TiVo's (TIVO) CEO Tom Rogers on Q1 2015 Results - Earnings Call Transcript

May.22.14 | About: TiVo Inc. (TIVO)

TiVo, Inc (NASDAQ:TIVO)

Q1 2015 Earnings Conference Call

May 22, 2014 17:00 ET

Executives

Derrick Nueman - IR

Tom Rogers - CEO

Naveen Chopra - CFO & SVP, Business Development and Corporate Strategy

Matt Zinn - General Counsel

Analysts

Todd Mitchell - Brean Capital

David Miller - Topeka Capital Markets

Eric Wold - B. Riley

Brian Fitzgerald - Jefferies

Alan Gould - Evercore

Barton Crockett - FBR Capital Markets

Rich Tullo - Albert Fried & Company

Heather Bellini - Goldman Sachs

Daniel Ernst - Hudson Square Research

Andy Hargreaves - Pacific Crest Securities

Mike Olson - Piper Jaffray

Operator

Welcome to TiVo’s Q1 fiscal year 2015 earnings conference call. (Operator Instructions). Thank you. I would now like to turn today’s conference call over to Derrick Nueman, Head of TiVo’s Investor Relations. Please go ahead.

Derrick Nueman

Thank you, and good afternoon. I'm Derrick Nueman, TiVo's Head of Investor Relations. Welcome to TiVo's first quarter of fiscal year ending January 31, 2015 earnings Call. With me today are Tom Rogers, CEO; Naveen Chopra, our CFO and SVP of Business Development; and Matt Zinn, our General Counsel.

We just distributed press release and 8-K detailing our first quarter financial results. We also have posted a first quarter key metric trend sheet on our Investor Relations website that includes, among other information and reconciliation of non-GAAP measures discussed on today's call. We have also included a two year historical data on our update metrics. You may access a recording of this call on our website for the next week.

Our prepared remarks today will last 25 to 30 minutes. Our discussion today includes forward-looking statements about TiVo's future business, products and growth strategies. We caution you not to put undue reliance on these forward-looking statements, as they involve risks and uncertainties that may cause actual results to vary materially from the forward-looking statements as described in our Risk Factors and our reports filed with the SEC. Any forward-looking statement made on the call today reflects our analysis as of today and we have no plans or duty to update them.

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

Tom Rogers

Thanks Derrick. Good afternoon everyone. This was yet another solid quarter of execution for TiVo. Let me run it down for you. Service and technology grew 39% year-over-year. Adjusted EBITDA increased by more than 25 million year-over-year to 26.9 million exceeding guidance. Total TiVo subscription surpassed the 4.5 million milestone, the highest level in the company’s history including the highest ever cable additions in a quarter with 341,000 MSO subscriptions added, a 9% sequential increase and a 23% year-over-year increase. TiVo-Owned gross additions increased 33% from the prior year even as we spent less on acquiring each subscription.

We continue to improve our product offering, instant access to Netflix through TiVo enabled operator set top boxes is now available in both Europe and also North America. We move forward with our strategic capital allocation plan closing the 135 million Digitalsmiths transaction and repurchasing a 110 million of stock. The Digitalsmiths integration is going well and we recently announced Charter, Sharp, and Moviefone as customers.

Before we get into some of the detail behind the strong quarter it's important to call out the record subscription milestone we recently reached and what’s behind that data. In 2011 TiVo had three operators deploying our solution, today, less than three years later TiVo has launched or will shortly be launching a solution with 15 operators across the globe not including Digitalsmiths operator customers.

The record high 341,000 MSO subscriptions we gained this quarter brought us to 4.5 million total TiVo subscriptions approximately 3.5 million of which are MSO subscriptions. While TiVo once was thought of as a hardware set top box solution, we’re clearly today primarily software and cloud based solutions company. We’re providing an efficient whole home solution, a total set of mobile solutions, IPTV implementation, a cloud based service hovering the user experience and the path to a network based DVR.

This all comes with a robust set of user features that go well beyond any other operator cable experience. It's clear that internationally and domestically operators are turning to TiVo because they recognize how we’re defining the future of television viewing. But beyond the subscription numbers what’s powerful is that our partners are reporting increased on-demand usage, lower churn and higher revenue per subscriber. We’re not only helping them to deliver a better product to their customers we’re helping them build a better business. As an example, in Spain our partner ONO recently announced that the TiVo product has reached more than 382,000 active users, a growth of 59,000 subscribers in just the last quarter.

In earnings presentation earlier this month the company reported that the availability of TiVo is driving “positive momentum in customer acquisitions, low churn levels and high customer satisfaction metrics.”

In Sweden, Com Hem reported 74,000 TiVo subs, an increase of 36,000 subscribers over the last quarter. Anders Nilsson, Chief Executive Officer of Com Hem, said during a recent earnings call that the TiVo rollout has become the fastest penetration yet among TiVo's international partners with 12% of their digital TV customers already subscribing. Nilsson added, “With the introduction of TiVo, and the rights we have cleared, we have the only next generation TV service in the country.”

Tom Mockridge, CEO of Virgin Media, which recently reported 2.1 million TiVo subscribers reaching almost 60% of UK cable households, said in a recent news article that “TiVo offers an unmatched user experience with intelligent search and recommendations helping viewers discover great entertainment, resulting in our customers’ watching more TV than before.”

Our domestic partners as well are attributing the introduction of TiVo services to attracting and retaining customers, including Atlantic Broadband. An executive for that company recently said on an earnings call, “We are already witnessing increased primary service unit sell-ins as well as increased ARPUs, we are now winning new Primary Service Units because we're offering TiVo in 90% of the territory.” And finally during a recent GCI earnings call, Peter Pounds, CFO, said, “On the video front, the increased demand for TiVo has increased ARPU and reduced churn.”

These are some examples of the market sentiment we’re seeing out there and we’re hearing it more and more. Between TiVo and Digitalsmiths, TiVo is now doing business with 18 of the top 20 by pay TV operators in the U.S. including telco and satellite providers not including our growing list of international customers.

Many of these relationships are in the early stages of deployment and are expected to drive significant growth over the next several years. Our pipeline is very strong and we believe that we’re well positioned to sign additional deals in the near term in multiple geographies.

Now let’s turn to some other highlights from the quarter. Recently we closed our Digitalsmiths transaction. The integration process is going well and Digitalsmiths is showcasing it's ability to reach Tier 1 operators and others through it's cloud based capabilities. Digitalsmiths recently announced the Charter has begun deploying a solution to it's nearly 5 million subscribers. Starting with iOS and Android platforms with additional devices and platforms planned.

DISH network also continues to rapidly expand it's deployment of the Digitalsmiths service. Digitalsmiths is successfully expanding our customer base beyond multi-channel video operators. As demonstrated by the announcement with Sharp Electronics and Moviefone. Sharp recently selected Digitalsmiths to create a video discovery experience for it's 2014 line-up of AQUOS LED televisions and Moviefone recently launched a new website with recommendations powered by Digitalsmiths. In fact, the expanded use of Digitalsmiths by customers like DISH Network, Charter, and others led to a 270% increase in Digitalsmiths' transactions volume relative to the prior quarter.

Moving to the TiVo-Owned front, TiVo Roamio continues to be well received by consumers which led to the 33% year-over-year first quarter increase in TiVo-Owned gross additions that I touched on earlier. Importantly we were able to deliver this strong growth despite a decrease in subscription acquisition cost compared to the prior year. To give you a sense of what people continue to say about Roamio, in a review of a related product Amazon’s Fire TV, the Wall Street Journal's Geoffrey Fowler said, “For the real TV lover, digital video recorder TiVo Roamio offers even more impressive search across recordable live TV, Internet streaming services and even cable content offered on-demand. For me, TiVo is as close as it gets for one box that rules them all.”

In addition, the rollout of Xfinity On Demand from Comcast for TiVo Premiere and TiVo Roamio retail DVR customers across their footprint continues to go well with better sales results in the markets where it is live. Deployments in all of Comcast's U.S. markets is expected to be complete this summer. Soon customers across Comcast's entire digital footprint will have access to the TiVo service combined with the massive Xfinity On Demand collection, and an ever-growing amount of web entertainment services like Netflix, Hulu Plus, Amazon Instant Video, YouTube, and Pandora in one, seamless viewing experience.

While we have had significant success over the past several quarters continuing to differentiate TiVo as a product, we must continue our hard work evangelizing how TiVo is at the forefront of the significant change is happening in the television world. As such this quarter we brought on Ira Bahr, as Chief Marketing Officer. Ira brings a wealth of industry experience notably from his prior roles as CMO of DISH Network and leading strategic marketing for Sirius Satellite Radio. He will be an integral part of our ongoing work to help consumers and operators alike understand the role TiVo plays in the complex TV ecosystem.

We also continue to innovate and enhance the TiVo offering. We’re building on our diverse suite of advance television products and services that focus on getting the consumer any content they want on any device. As I noted earlier, TiVo introduced Netflix to the U.S. cable industry by being the first to integrate Netflix into the TiVo cable set-top box experience with U.S. operators Atlantic Broadband, GCI, RCN, and Suddenlink, as it is with European operators Virgin and Com Hem. This allows customers in both the U.S. and in Europe instant access to popular Netflix programming like House of Cards without having to change inputs, and at the same time, giving them access to integrated search, browse, and recommendation functionality for cable and over the top programming without having to focus on where any individual program might be coming from.

A recent Wall Street Journal article noted, “TiVo set-top boxes are being targeted for the Netflix rollouts, in part because they are more advanced than the outdated set-top boxes in many U.S. households.” Additionally we’re progressing with our advanced cloud based services, including network DVR and thinner and more economical set-top boxes.

Moving to our audience research and measurement business, TiVo Research, we’re putting deals in place with advertising technology companies where we’re delivering a deeper offering across many aspects of the advanced measurement space without having to invest substantially more in R&D. As an example this quarter we secured a partnership with Symphony Advanced Media, a technology leader in passively captured cross-platform media measurement.

Together, we will be creating the largest single-source, cross-media panel of opt-in participants in the market. The product enables deep insights into consumers' media consumption and social media engagement across screens, coupled with detailed demo- and psychographics, advancing understanding of the interplay between media and marketing beyond what is currently available in the market today.

We also recently signed a deal with Datalogix which helps leading brands reach audiences and buyers across display, video, mobile and social and measures the offline sales lift from digital marketing campaigns. TiVo Research and Datalogix's combined expertise spans the major consumer segments, including Television Tune-In, CPG, and Automotive. Our combined panel of consumers of 740,000 represents the largest single source cross media panel in the industry.

And finally on the capital allocation front, we’re excited by the growth prospects of our now completed 135 million Digitalsmiths acquisition and in addition we repurchased a 110 million worth of stock this past quarter as we said we would on our last earnings call bringing total open market repurchases to 225 million over the last 15 months, looking ahead we will continue to be strategic and deliberate with our use of cash and we will provide you with details of our plans as it's appropriate to do so.

In summary, we executed well this past quarter delivering strong financial results, growing our subscription base and driving new innovation. We’re excited about the prospects of signing new deals in the short term which together with the prospects of Digitalsmiths as well as smart capital allocation will set the stage for enhanced future financial and operating performances.

With that I will now turn it over to Naveen.

Naveen Chopra

Thanks Tom. Good afternoon everyone. Q1 was another strong quarter for TiVo. Our service and technology revenue was 86 million up 39% year-over-year. Both adjusted EBITDA and net income exceeded our guidance and adjusted EBITDA improved over 25 million from the year ago quarter. As Tom noted we added over 330,000 net subscriptions in the quarter reaching 4.5 million total subscriptions and surpassing our previous high sub mark.

Before discussing the details of this quarter’s results, I’m going to review some changes that you will see in our reporting of key business metrics starting with our Q1 results. As our business has evolved both through the growth of MSO based distribution and our expansion into new business opportunities like Digitalsmiths, we believe this is an appropriate time to update some of the metrics we provide in our financial disclosures. We believe these modifications are important in providing clarity around the drivers of our business and so I will provide a brief explanation of each of the changes.

First in addition to providing MSO subscription information which is tied to a specific device we will now also be providing the number of deployed MSO households. Many of our recent MSO deals are priced on a household basis given the increasing popularity of our multi-room and multi-screen offerings. Providing MSO household numbers will enable investors to better model future MSO revenue growth.

The second change is driven by the fact that we believe MSO ARPU has become a less helpful metric due to the distortions caused by inclusion of minimum guarantees and the exclusion of revenue on deals but we’re still recouping development cost and are therefore unable to recognize service revenue. We will continue to provide the underlying data for the previous MSO ARPU calculation. But given the voice around this metric we won't be reporting it going forward.

That said using the data that is provided if you were to calculate MSO ARPU using the disclosed revenue and subscription numbers you would notice that the ARPU declined this quarter due to several factors including the sequential decrease of DirecTV revenue which I will explain later and continued growth in international subscribers from ONO and Com Hem that don’t contribute to service revenue because license fee payments under those deals are still being recognized as technology revenue.

Additionally it is worth reiterating that incremental domestic subscriptions typically generate sub fees in excess of the resulting ARPU calculation while international deployments are generally lower than the calculated ARPU. The third change in metrics relates to the composition of our service revenue. With the Digitalsmiths acquisition we will be breaking service revenue into three components, TiVo-Owned revenue, MSO revenue and the third piece media services and other revenue. Media services and other will include the recurring monthly sub-fees received by Digitalsmiths as well as advertising and research revenue.

Note that our trend sheets include historical service revenue information broken down into these three components for the past two years.

With that lets now review some of the details of the quarter. As previously stated our service and tech revenue grew 39% year-over-year driven by IP settlements and a 37% year-over-year increase in MSO revenue. Sequentially our MSO revenue declined slightly which was driven by lower DirecTV revenue. As we have discussed in the past we typically benefit in Q4 from the recognition of deferred service revenue from unused DirecTV development credits.

Excluding the impact from the DirecTV development credits, MSO revenue would have increased sequentially. Additional as Tom mentioned we are accelerating MSO additions which grew 23% over the year ago quarter and similar to last quarter that growth was comprised of strong deployments from multiple partners both in the U.S. and abroad.

Our purchase of Digitalsmiths closed on February 14, so our results include 2.5 months of Digitalsmiths revenue. The integration has gone well and our focus is on growing the business. Digitalsmiths generally receives recurring monthly revenue from MSO deployments so we expect to see significant revenue growth as the services rolled out in more household. The revenue growth rate should be high because many of the deployments are just beginning. For example we launched with Charter on it's TV Everywhere applications, DISH which had already integrated Digitalsmiths into it's tablet application recently deployed us in it's next generation set top boxes and Foxtel in Australia is in the early stages of roll out on multiple platforms.

As we drive revenue growth we expect to see strong incremental margins leading to a material benefit to adjusted EBITDA. Our overall adjusted EBITDA results exceeded expectations this quarter and improved significantly compared to the fourth quarter. This was a combination of two factors, first, our sales and marketing acquisition spend decreased by 4.5 million sequentially and by roughly 400,000 year-over-year. Despite the lower marketing spend we experienced a 33% year-over-year increase in TiVo-Owned gross additions. The combination of lower marketing spend and growth in gross additions also pushed SAC down to $130 in the quarter.

Although we’re happy with these results it is important to point out that like last year our marketing activities will probably be skewed towards the holiday season and therefore we expect SAC levels to vary over the course of the year.

The second contributor to higher than expected adjusted EBITDA was stronger hardware margin in our MSO business which we continue to believe will decrease in the future as more of our domestic operators opt to use TiVo software on third party devices and as we expand the number of third party manufacturing partners who have integrated with TiVo software.

Our net income in the first quarter reflected a full GAAP tax rate that we expect to pay significantly lower cash taxes for the foreseeable future. Net income also included approximately 1.3 million of incremental amortization related to the Digitalsmiths acquisition. Another important component of Q1 was the execution of the share buybacks we described on our last call. We repurchased 8.4 million shares in the quarter, however our reported weighted average shares, average basic shares outstanding declined by only 4 million because the buyback activity occurred mostly in the back half of the quarter. We expect a full impact of the 8.4 million shares repurchased to be incorporated in Q2.

Additionally, the sequential increase in our average weighted diluted shares outstanding was driven by the inclusion of 15.5 million shares underlying our convertible debt instrument in Q1 which were excluded from the Q4 calculation due to GAAP rules that require us to remove the underlying convertible shares if they would be anti-dilutive to net income.

Moving to the balance sheet, we utilized 135 million in the quarter to purchase Digitalsmiths and a 110 million on the share repurchases which included a 100 million of repurchases under our 10b5-1 plan and approximately 10 million related to the repurchase of vested restricted shares. This brought our total repurchases over the last 15 months to approximately 225 million. The combination of the Digitalsmiths transaction and share repurchases reduced our overall cash position to 742 million, we expect our cash position to increase during Q2 due to our annual DISH payment and positive changes in working capital.

Consistent with our previously articulated strategy we will continue to focus on opportunities to deploy our cash resources in a cautious and prudent manner that is designed to drive shareholder value and which may include additional M&A and/or share repurchases. We believe our careful approach to M&A paid off with Digitalsmiths, a company that was barely on the radar 18 months ago but became actionable as a result of our patience and diligence and yielded a reasonably sized acquisition opportunity that we believe has all the ingredients of a good acquisition, a strong strategic fit, demonstrable market traction, high growth potential and strong margin characteristics.

Now getting to our guidance, for the second quarter of FY ’15, we expect service and technology revenues of 86 million to 88 million. We expect adjusted EBITDA to be in the range of 27 million to 30 million and net income to be in the range of 6 million to 9 million. Driving the sequential improvements in service and technology revenue adjusted EBITDA and net income will be revenue growth in Digitalsmiths and our MSO business. The trend we expect to benefit us throughout the year as well as slightly lower operating expenses.

Finally based on our first quarter results and the mid-point of Q2 guidance range, our adjusted EBITDA is expected to be approximately 55 million for the first half of the year. We believe this puts us on track to achieve the adjusted EBITDA in excess of a 100 million for the full fiscal year 2015.

With that lets now take questions.

Question-and-Answer Session

Operator

(Operator Instructions)

Naveen Chopra

Before we take questions, I wanted to make a quick clarification. The press release that just went over the wire had a small inventory error on the balance sheet that related to deferred income tax. We have corrected and we have put a correct version of our 8K which is filed with the SEC and in our website. Suzanne with that let’s take our first question.

Operator

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

Todd Mitchell - Brean Capital

I would like to talk about the acceleration that you’re seeing in the U.S. MSOs, could you give us specifics as to how many MSOs are deploying now and also you’ve talked about sort of the rise that you get in ARPU and the decline that they are seeing in churn. Is there any way that you could quantify that for us?

Tom Rogers

Well we’re up to 12 U.S. operators at this point in the -- what we would broadly define as the Tier 2 states, midsized and smaller MSOs. I would say that that opportunity is probably in terms of subs only about half penetrated by us meaning MSOs with which we have agreements cover about half of the sub base that the entire Tier 2 population serves. We’re also only about 5% penetrated today of our U.S. cable relationship, many of those are fairly new relationships that are just getting started and so there is a lot of upside opportunity there. The sub-fees on the U.S. component of our distribution is much higher than our overall average meaning the international distribution is at a lower sub-fee. So as that U.S. distribution grows and we expect to see good performance out of it over the coming quarters. There is increasingly strong revenue contribution that can come from there.

The benefits that our U.S. partners are seeing which does relate to both churn on their part being reduced ARPU, increasing on-demand viewing, increasing -- varies from operator to operator and varies based on where they are in the deployment cycle. But certainly and significant enough that provides a fair amount of chatter between MSOs on the value of being involved with TiVo goes to the heart I think of why the proposition has taken off the way it has some of that we’re running the tables among the Tier 2 community and I think the overall metric that many of them look at which is also responding extremely nicely is the one on overall customer satisfaction of their product offering and there TiVo clearly is contributing quite significantly.

So, I don’t have a further quantification of it beyond that but we’re seeing very strong performance on a number of metrics for all of them.

Todd Mitchell - Brean Capital

And one more question, with the Comcast Time Warner merger now we have AT&T and DirecTV, can you talk to us a little bit about how you feel that will impact both deployments within deals that you’ve already won and what is that going to have as an impact upon technology decisions with perhaps operators that have not made decisions yet?

Tom Rogers

Well both of those are part of the ongoing trend that we talked about before in terms of consolidation in the industry. In contrast to my point about TiVo and the Tier 2 operators our acquisition of Digitalsmiths was exquisitely timed relative to being able to serve larger operators. It was already serving about 7 of the Top 10 large operators. Together we now serve 18 of the Top 25 operators in the U.S. including telco and satellite operators and our ability to have multiple ways to meet the needs of operators, obviously those -- they are in the Tier 2 community and are likely to take the full suite of TiVo products. We have ways of looking at the TiVo service as a cloud based back bone where somebody else may develop their own UI, as the larger guys tend to do and Digitalsmiths has clearly found a role in the powering of the UI elements in search and recommendations and browse, et cetera in driving UI activity.

They too have entered into broad agreements covering about 65 million subscribers and they have just begun penetrating that base and as they begin to really have their deployments roll out there is a significant additional revenue opportunity in front of them largely coming from the Tier 1 operators. Time Warner Cable, DirecTV, our clients there, and we see continuing to be able to provide service to large operators. Obviously we can’t predict what technology decisions may or may not result from these acquisitions but certainly Digitalsmiths feels that it's deeply engaged with the right people to be able to move the business forward.

Operator

Your next question comes from the line of David Miller with Topeka Capital Markets.

David Miller - Topeka Capital Markets

Just a couple of broad strategic questions, Tom or Naveen how would you guys couch your overall relationship with Liberty Media at this time? I’m actually kind of surprised that there has been no commercial deal announced between you and them as of yet. I’m just wondering what might be going on there if anything. Certainly they have seen what you guys have been doing with ONO and Com Hem, and have just been kicking butt all over the continent and I’m just wondering how you would describe the relationship and then Matt Zinn if you’re on -- just an overall legal question if you don’t mind. If Aereo should win in the supreme court and I guess that decision is set to be handed down in late June or so, would you consider going back into litigation mode against them given that they are in violation of your 389 patent holdings. Appreciate the insight. Thanks very much.

Tom Rogers

On your first question I think you’re probably you were referring to Liberty Global.

David Miller - Topeka Capital Markets

Liberty Global, yes. What I say Liberty Media? Sorry.

Tom Rogers

Liberty Global has developed as a relationship that we feel quite good about obviously going back to the original acquisition of Virgin. I think there were mindsets both inside and outside the company as to TiVo may not be long for it's continued involvement with Virgin. What’s turned out of course is that Virgin under new management has seen the value that TiVo has brought, we now represent about 60% of the UK cable market in terms of subs that have -- their deployments. We have strengthened the relationship over the last several months, a company that we in terms of Liberty Global that we really had no relationship with before. It is led to being able to be in regular strategic and product discussions with them that may have opportunity for us to broaden our Liberty relationship but first and foremost the best way for us to serve any long term goals we have with Liberty Global is continue to deliver as Virgin in a way that continues to outpace their expectations relative to what they originally came in with. So we feel good about the relationship. Matt, over to you.

Matt Zinn

So David it won't surprise you that we don’t comment on potential litigation but to the extent if somebody is benefiting from an unauthorized usage of our innovation and we lack a commercial relationship with them ten I think we have shown in the past that we don’t hesitate to take action.

Operator

Your next question comes from the line of Eric Wold with B. Riley.

Eric Wold - B. Riley

I had a follow-up question on one of Tom’s earlier comments about kind of the pipeline around positions on multiple new deals near term, multiple geographies. Maybe just to kind of get a sense of where you’re in those discussions with those offers? How far down the path are you on average? And then kind of sorts ones that are still in negotiations -- well, I guess all of them are in negotiation, you know what would you characterize as a major sticking points now on those deals. Is there anything other than price or is there something else that’s kind of maybe holding them back from getting involved?

Naveen Chopra

So in terms of the pipeline generally we have described it as robust. I think one of the reasons we think of it that way is we have a number of different discussions that are at all stages in the process. We have some that are obviously somewhat preliminary but there is others that were in some more advanced stages and digging into the details of what a relationship may look like. We’re always cautious about framing that up too explicitly because there is certainly cases where those things result in deals and others were they don’t but we like the opportunities that we see in front of us through a number of these discussions. In terms of the sticking points I wouldn’t look at them that way, I really look at it more in the context of -- these are very complex, very strategic relationships. There are a lot of important details that have to be worked everything from the economics of the relationship to a lot of complex technical issues about how the product is going to be integrated and deployed and the reality is it takes time to work through those things and frankly the more we’re able to engage in those details with some of these partners the more serious we know they are and the more stake they have in the effort. So, all reasons why we feel good about some of those stuff coming down the pipe.

Operator

Your next question comes from the line of Brian Fitzgerald with Jefferies.

Brian Fitzgerald - Jefferies

I know it's too early days but can you give us any early indications of demand around or deployments or traction around Netflix enabled set top boxes? Any feedback from users or MSOs? And then a quick second one, as you talked about this move toward center and more economical set top boxes and devices. Can you help us think about the opportunity there? What’s driving the trends to these lower cost boxes? Is there any timeframe around your network DVR? Thanks.

Tom Rogers

Well on the Netflix front as most of you know we began implementing Netflix as part of the cable operator offering in Europe and just within the last few weeks brought that same notion to the United States with four of our cable partners now being able to have Netflix as part of their integrated offering. It's way too early to be able to point to any metrics there and of course operators or Netflix would tend to offer any specific. As a general matter I will say this that Netflix being the leading brand name in over the top space is really seems to be giving some opportunity for consumers to better understand the basic proposition we stand for which is putting linear television together with over the top new streaming services and through a single offering. You’ve the ability to search and go across the board to find your content and being the leading brand name in the category I think it makes the proposition more understandable and from our point of view we think that will help accelerate the growth of TiVo subs and with that accelerate the growth of subscriber revenues.

On the lower cost box front for the focus that it has largely come with that issue is the CapEx one for the operator. Can they move as they consider next generation hardware to a new set top box that maybe much cheaper for them to deploy than one that has the full DVR hard drive capabilities built into it. And it's unclear how many operators really are going to move to that kind of approach near term but very importantly from our point of view they want to know when they are making a technology decision with a technology partner that’s as strategic as we are defining the future of their entire television experience to consumers that we have the ability to get them from the current technology to one that maybe fully cloud based with an NDVR built into it.

So we have been demonstrating our NDVR in the unique capabilities that we can provide in it and our NDVR offering is less a function of our timing in terms of ability to do it and more of a function of when the operators that we work with may want to get to that level of cloud based servicing. In the meantime we’re building more and more cloud based product and feature into the TiVo service so that the pace of innovation and the cost of being able to provide next generation revs of our software gets to be cheaper and cheaper for both us and the operator to be able to integrate because they are less based on hardware necessities and so in the meantime that thrust is a key part of our developing our cloud product.

Naveen Chopra

I would actually add to Tom’s comment that, I wouldn’t associate the notion of a more economical solution exclusively with the network DVR that is one potential part of the solution but a lot of the things you see us doing whether it's Digitalsmiths or the modularization of the TiVo service, our design to provide ways for operators to get advanced capabilities, higher quality, user experiences, more personalized user experience without having to go through a major set top box upgrade, major middleware upgrade, things of that nature. So I think we have got some creative ways to make the use of a lower CapEx approach successful for these guys even before they get to NDVR.

Operator

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

Alan Gould – Evercore

I’ve got two questions, first Naveen can you remind us as Tom said you basically have had a run on the second tier U.S. operators. Which second tier operators are still out there? And would most of your new deals likely be international and the second question would be can you flush out a little bit the issue with DirecTV and is that recurring or is that only first quarter impact?

Naveen Chopra

Sure. So on the first quarter related to the mid-tier operators in the U.S. It's a little bit of a tricky question actually Alan because the nature of that part of the market is probably too many to name. So we think of it more in quantitative terms as Tom said in one of his earlier comments, I think there is about 10 million households in the U.S. that are served by that class of operator. One way to think about it is we have got about half of those under contract of the ones that are under contract we have just begun to scratch the surface of the deployment, we’re a little below 5% in terms of the subs that are currently active. So you know there is a lot of upside there both between going from something below 5%, something that we expect would be very high level of penetration with the guys that are already on the contract and we fully expect that of the 5 million or so homes that are not yet in a relationship with us that we will win many of those over the course of the coming quarters. We have really established ourselves as the most efficient and effective solution for that class of operator to deploy an advanced solution.

Tom Rogers

It's also a trick question because the ones you’re most likely to name are the ones you’re most likely to be in contact with most deeply right now and we obviously don’t give information about who we’re negotiating with, although it was a good try.

Naveen Chopra

I guess the second part of that question, in terms of does that imply that your opportunity or our opportunity is mostly international? Obviously many more subscribers that can be obtained in the international market although as you know the economics of the business outside of the U.S. are different such that 5 million subscribers in the U.S. can contribute the same amount of revenue as a multiple of that subscriber level outside the U.S. So we think both are very important opportunities in terms of driving our growth both near and long term and my description of the pipeline earlier includes folks both here in the U.S. as well as some folks outside of U.S.

The second question on DirecTV, that is a fourth quarter issue but it does happen every fourth quarter so it's recurring but once a year.

Alan Gould - Evercore

Will the DirecTV fees be normalized in the second quarter?

Naveen Chopra

Yes. What you will see another flush in Q4 of ’15 if DirecTV does not utilize the credits that they earned this past year.

Operator

Your next question comes from the line of Edward Williams with BMO Capital Market.

Unidentified Analyst

(Indiscernible). Just two quick questions, one with ramp up of Digitalsmiths over the next year or two, I was just wondering has that impacted your expectations for R&D and sales and marketing at all and then two I was just wondering if you’ve have -- your thoughts on any litigation or contingency plans, you know that CableCARD integration bill comes in a negative way.

Tom Rogers

On the Digitalsmiths front, Digitalsmiths is a much lower cost product than the guts of the TiVo offering in terms of the broader user experience brings with it much lower sub-fees as well but has agreements to be distributed among some of the larger operators so the scale of the distribution that can have despite it's lower sub-fees can provide very material revenue but it's a much lower cost product. We’re beginning to get a really good feel for the R&D synergies that can exist between the TiVo service and the feature sets related to personalization and Digitalsmiths and a high degree of activity between the teams there that I think will drive some interesting cost opportunities for us.

On the CableCARD front, there is legislation that is going through the house that is very much opposed by us in terms of how we believe it would deprive consumers of the kind of choice that they have when it comes devices in other realms of communication, smartphones, laptops, tablets, their home telephone and set top boxes as TiVo has shown with our retail product or should not be in a different footing there. Access to television signals is key to having that footing, CableCARD’s provide that access, cable operators don’t want to use it for their own boxes but they are saying that they would continue to provide CableCARDs to retail boxes such as our own.

Despite their saying that we believe the senate will look at this legislation differently and is likely to have a very different view of what’s the right way to approach this important policy question.

Naveen Chopra

And going back to your Digitalsmiths cost structure question, just note that the Digitalsmiths R&D and sales and marketing cost were reflected for most of this quarter so it should already be in the numbers.

Operator

Your next question comes from the line of Barton Crockett with FBR Capital Markets

Barton Crockett - FBR Capital Markets

Just to drill a little bit more on Digitalsmiths. The 900,000 year-over-year increase in your media service and other line, that new line, was that all Digitalsmiths? And the 227%, I think you quoted, growth in transaction volume, is that a regional both reasonable proxy for the type of revenue growth in that line? And is it reasonable to assume that the revenues come in as basically pure contribution margin and that there is really not a lot of variable expense there?

Naveen Chopra

On the first part of the question in terms of the revenue, remember that component of service revenue has three things in it including the advertising revenue, the audience research revenue and now Digitalsmiths. And as you may recall the other two components meaning the advertising and ARM, tend to be somewhat volatile. So what you actually saw happen in Q1 is they decreased relative to the prior quarter so the Digitalsmiths revenue is substantially higher than just the delta between the Q4 and the Q1 number.

In terms of the question around the transaction volume, I guess couple of things to point out it's somewhat early to tell in terms of whether this quarter is a kind of a run-rate in terms of transaction growth. We’re obviously deploying with a number of new partners and a number of new platforms being lit up within those partners and that obviously create some very high growth percentages. So we will monitor that over the next few quarters.

It's worth pointing out though that the way Digitalsmiths gets paid is not tied explicitly to transactions, it is paid on a recurring per subscriber basis somewhat independent of the number of transactions. I think the transaction volume and the trajectory there is more of an indication of engagement and adoption by various operators and various platforms.

Tom Rogers

But just to remind you that the degree to which Digitalsmiths is a core component of their offering is important -- those transactions are otherwise known as consumer interactions are in the 100s of millions and so there is very, very substantial element of Digitalsmiths powering the user experience that they are being used for.

Barton Crockett - FBR Capital Markets

Okay. But, on the expenses, are the expenses pretty flat as the revenues grow? Is this pretty much pure contribution margin?

Naveen Chopra

Yes. I think at this point I would say is they are very high gross margin and most of the OpEx is already built in. We expect there will be some growth in that and that’s built into our plans as the business grows but one of the things that we really liked about it as an acquisition was the fact that it has very high margins as the service scales.

Operator

Your next question comes from the line of Rich Tullo with Albert Fried & Company.

Rich Tullo - Albert Fried & Company

When we are looking at Digitalsmiths, you're saying that you monetize on a sub basis. Is that MSO household subs in line with how you are reporting things now or--?

Tom Rogers

Well it's not included in the MSO revenue, it is included in the third component of service revenue --

Rich Tullo - Albert Fried & Company

No, no. That I get. But, I am saying, is the sub similar in definition or is it on --

Tom Rogers

Typically yes, household and each contract is a little different but it's similar but we do not report the number of households for Digitalsmiths. So when we’re talking about MSO household it's specific to the MSO revenue line.

Matt Zinn

And Rich we also can get paid on connected devices or content sites where they power certain experiences.

Rich Tullo - Albert Fried & Company

Okay. Good. And, when we are looking at CableCARD and then we look at the Time Warner merger, is that an opportunity to validate the concept of CableCARD by the FCC? Is that your sense as to how they are going to look at it, just as they validated net neutrality in the last merger?

Tom Rogers

I would say that the Time Warner Comcast merger poses a bunch of policy questions for the commission not the least of which is the question of competing devices and access to signals for retail consumer devices and I think the fact is that we have a very strong product in the Comcast footprint because Comcast has gone beyond the CableCARD with the full integration of Xfinity, their two-way on-demand service for the retail customer along with what the one-way CableCARD provides. And so that’s a good model but in terms of the overall policy implications and how it relates to the merger and whether the merger is a good idea or not are all wrapped up in those policy questions that will be in front of the commission and we’re still formulating our view on that.

Rich Tullo - Albert Fried & Company

And then, just kind of an unrelated question there, when you look at what has transpired with Netflix and Suddenlink, that technology has been around since 2010. So what changed over the last two or three months to enable that switch to be entitled, so to speak?

Tom Rogers

Well for a while I’m not sure the operator community believe that Netflix was necessarily a program aggregator that they wanted to support. I think many at first viewed Netflix as potentially competitive with what they were doing as we began to increasingly evangelize how our retail product is viewed of being able to bring together cable and the best of the streaming world into a single interface with unified search and other features like that. I think that cable operators began to understand that the advanced television future was dependent on bringing together those worlds and increasingly became clear that bringing together those worlds without having Netflix as a part of it was not going to be something that would be as appealing to the consumer than that Netflix was a part of it. I leave to Netflix to comment on the period of time it took for them to begin to service that community but now that they are in a position to do so I think it's fair to say that there is a lot of enthusiasm among our operators for embracing Netflix.

Operator

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

Heather Bellini - Goldman Sachs

This could be one quick one. Can you give us a sense of how important Roamio is in helping you drive -- just explain the factor in helping you guys drive MSO subs? And as a part of that, of the different SKUs -- the three different SKUs -- the 200, the 400, the 600, which -- can you give us a sense of how the sales breakdown is coming? Thanks.

Tom Rogers

Roamio first and foremost from an operators point of view stands for great innovation for which the TiVo brand got terrific recognition as recently as the release of Amazon’s Fire product and the media blitz that occurred on that and the key reviews whether from Wall Street Journal or the New York Times both went out of their way to mention that Roamio TiVo is the best experience around and so the fact that continues to provide a way for them to see our innovation, know that we can port that innovation to their offering and know that they get the benefit of the halo effect of being able to have TiVo at the heart of their advanced television going forward, certainly contributes to the ongoing strength we’re having in the operator community.

We are seeing all SKUs of the TiVo with momentum that we have pointed to that turned into the 33% year-over-year increase in retail sales. The base Roamio product is the one that has ATSC tuners in it and we have seen some growing interest there among those who want to use it just for over the air and over the top content. The other two with the built in streaming capability which goes to the heart of giving Roamio its name. Certainly the mobile applications and being the one place in the cable environment today that you can get your recording delivered on your tablet, wherever you’re around the world is driving them the lower SKU has some greater volume than the higher SKUs but we have seen overall an improvement in the split of the higher SKUs relative to what we tended to see in the past.

Operator

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

Daniel Ernst - Hudson Square Research

Two quick questions, if I might. One is a follow-up to the CableCARD question. As I understand it, in many of these mergers, they are regulating through commitments that they impose on the mergers. And a lot of the ones that Comcast and AT&T, et cetera, have volunteered so far have more to do with net neutrality. But I am wondering if there is an opportunity to impose a commitment to CableCARD and to set top box access in those mergers. And then, second, a consolidation question. In Europe, given Vodafone's acquisition of ONO, and their prior acquisition of Kabel Deutschland, does that open up the opportunity in Germany for you and you can talk more broadly about opportunities given consolidation in Europe? Thank you.

Tom Rogers

Well in the CableCARD front all I can really say is that our views on the Comcast Time Warner merger and the AT&T DirecTV merger are continuing to evolve and I think appropriately so the kind of policy questions that CableCARD goes to will be front and center in the FCCs consideration of those deals. On the Vodafone front, we have opened up a dialogue with Vodafone because of the ONO acquisition and because of how important TiVo has been to driving their video business forward which has gotten a lot of recognition and they have been very clear about how important TiVo has been to their growth and development and it's a great showcase for Vodafone which is looking as if it too will be a major operator on the continent.

The fact is we had no real relationship with the company beforehand, similar to Liberty Global and now we have a relationship with them and have the ability to explore possibilities with them and we look forward to doing so.

Operator

Your next question comes from the line of Andy Hargreaves with Pacific Crest Securities.

Andy Hargreaves - Pacific Crest Securities

You guys answered most of my questions. The only other one I had was can you just give us a sense where you are expecting for tax rate?

Naveen Chopra

Yes. So this quarter the GAAP tax rate was basically a full tax rate right around 45% between federal and state. Keep in mind that our cash tax is substantially less, in fact this quarter we didn’t really have a cash tax expense. Going forward we expect GAAP tax will be similar to this quarter that will mostly be coming off the deferred tax asset that sits on the balance sheet. And we therefore expect our cash tax to be pretty minimal for the foreseeable future.

Operator

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

Mike Olson - Piper Jaffray

Just a high level question. Are there differences or is there any difference between your U.S. and international opportunity with MSOs? And I guess specifically what I mean is, are there differences in the pace of innovation by operators that are domestic or international? And is there difference, more or less in -- as far as in-house work going on at MSOs domestically or internationally?

Tom Rogers

Broadly speaking there are differences between our U.S. and our international distribution. Certainly the fees on the U.S. distribution side tend to be considerably higher but the volume of sub-opportunities that exist internationally maybe much greater. On the cost side, we have gotten the cost down of a U.S. MSO implementation to a very modest number, we’re implementing these entirely new software technology for operators with a few $100,000 of related R&D expense to get them going, the cost of an international deployment where there is not anywhere near the degree of uniformity and therefore much higher degree of customization, the cost of those initial deployments, R&D associated with it is much higher. But in terms of the overall innovation they both drive off of a common code base, where the feature development they were able to port domestically and internationally is very similar. We do see individual operators looking for some customized work and in fact some of that is driven to-date more internationally than domestically but overall the offering that TiVo has and it's ability to bring together the many elements that make up the TiVo experience is fairly similar between U.S. and international activity.

Operator

And there are no further questions at this time. I would now like to turn the call back over to Tom Rogers CEO for any closing remarks.

Tom Rogers

Well thank you. Obviously TiVo has come a long way over the years, come a long way over the last year as today’s financial elements indicate and have come a long way over the last quarter and we feel very comfortable about how we continue to lead the way on advanced TV and we’re excited about the way our future looks. So thank you for joining us and we will be updating you soon.

Operator

Thank you for participating in today’s conference. You may now disconnect and have a wonderful day.

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