TiVo, Inc. (NASDAQ:TIVO)
Q2 2015 Earnings Conference Call
August 26, 2014 5:00 PM ET
Derrick Nueman - VP, IR
Tom Rogers - CEO and President
Naveen Chopra - CFO and SVP, Corporate Development and Strategy
Matt Zinn - SVP, General Counsel and Chief Privacy Officer
Jim Goss - Barrington Research
David Miller - Topeka Capital Markets
Brian Klein - National Alliance
Rob Sanderson - MKM Partners
Eric Wold - B. Riley
Brian Fitzgerald - Jefferies
Barton Crockett - FBR Capital Markets
Tom Eagan - Telsey Advisory
Mike Olson - Piper Jaffray
Shakeel Alam - Goldman Sachs
Richard Tullo - Albert Fried & Company
Edward Williams - BMO Capital Markets
Daniel Ernst - Hudson Square
Ladies and gentlemen, thank you for standing by. And welcome to the TiVo Second Quarter 2015 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. (Operator Instructions) Thank you. I would now like to turn conference call over to Mr. Derrick Nueman, Vice President of Investor Relations. Please go ahead sir.
Thank you, and good afternoon. I'm Derrick Nueman, TiVo's Head of Investor Relations. Welcome to TiVo's second quarter of fiscal year ending January 31, 2015 earnings Call. With me today are Tom Rogers, CEO; Naveen Chopra, CFO and SVP of Business Development and Corporate Strategy; and Matt Zinn, our General Counsel.
We have just distributed a press release and 8-K detailing our second quarter financial results. We also posted a second quarter key metric trend sheet on our Investor Relations Web site that includes, among other information a reconciliation of non-GAAP measures we have discussed on today's call. You may also access a recording of this call on our Web site over the next week.
We expect the prepared remarks today will take 25 to 30 minutes and it will be followed by a question-and-answer session. 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 will now turn over the call to Tom.
Thanks Derrick. Good afternoon everyone. This was another quarter of solid execution and growth for us at TiVo. Highlights, adjusted EBITDA was 29.9 million excluding the impact of the significant litigation proceeds and related expense from last year’s Cisco/Motorola settlement. Adjusted EBITDA increased 73%. We increased our cash position by 40 million to 782 million and are looking to return close to half of that to shareholders over the last next few years. Service and technology revenue increased 13% year-over-year and we saw a 37% increase in MSO service revenue from a year ago.
TiVo subscriptions now total 4.8 million, a 33% year-over-year increase. We reached a landmark agreement with Comcast to continue to support CableCARDs that will also increase ease of installation and to work together on a future non-CableCARD solution and we continue to increase our operator distribution reach recently announcing deals with Cogeco and EnTouch.
The global adoption of Cogeco continues to accelerate and we’re seeing particularly strong results with our operator partners. As I just said, our MSO service revenue increased by 37% from a year ago and as we delivered 283,000 MSO subscription editions in the second quarter which was about 20% better than the year ago quarter. These are strong results even when considering that the second quarter is typically a seasonally slow period.
We’re quickly approaching the 5 million total subscription mark. It’s a huge improvement to what we saw adjusted at the beginning of the last fiscal year when we reported just over 3 million total subscriptions. Our long-term business growth strategy is playing out nicely, but as we’ve discussed with you previously there is tremendous upside ahead of us. TiVo is currently deploying with operators representing just over 10 million subscribers and even with the significant sub-growth we have seen over the past few years, we are only a little over 30% penetrated across that footprint and we see significant upside ahead especially in domestic markets.
When you look at it like that, we have a lot of additional potential distribution just from the relationships we already have importantly this is before you get to the many new relationships we’re in the process of developing across Europe, the U.S., Latin America and in Canada, which is a market that has real potential and one where until recently we had no presence. Our pipeline has never been stronger.
The traction we’re seeing from operators both domestically and internationally underscores our leadership and our strong operational momentum. We’re building on our market leading product especially as operators demand and use more of our technology and features. These developments help us as we forge new operator deals, which is a good segway to a discussion around the new deals we reasonably signed.
First Cogeco signed on with us choosing TiVo over the prior advanced television solution that was in development. Cogeco has over 800,000 television customers in Canada and over 1 million television customers when including Cogeco’s U.S. subsidiary Atlantic Broadband. Deployment is expected to begin early next year. The strong reception that TiVo continues to see with Atlantic Broadband led to the deal and as a matter of fact Atlantic Broadband success with TiVo was recently highlighted in Cablefax Magazine, which recognized the deployment of Netflix via TiVo as the MSO Technology Launch of the Year.
In discussing the rearrangement of their strategy during a recent earnings call, Louis Audet, Cogeco's President and CEO, said, “TiVo is really a world-leading force in bringing futuristic television viewing options to cable customers and allowing content to be viewed, whether it's linear content, on-demand content, whether it's over-the-top content, can now be viewed on television, on the iPad, on the smartphone, and they have developed a platform that allows us to do that seamlessly.”
Further, we recently signed a deal with EnTouch based in Houston, Texas, which yet is another Tier 2 operator we have brought on-board. As we discussed last quarter, the Tier 2 domestic market is a significant opportunity for us. Today we reached about 5% of U.S. Tier 2 households and we believe there is the potential to drive this penetration to at least half the market at our cruse that are currently in access on average of $2 per month.
Touching on a few details from our existing relationships, in Sweden, TiVo powered Com Hem to positive subscriber additions for the first time in two years. And they've reached 17% TiVo penetration in only nine months of deployment. Anders Nilsson, Chief Executive Officer of Com Hem, said during a recent earnings call that “This very fast pickup is attributable to the fact that TiVo is the only true next-generation media service in the country with the widest TV channel offering and incorporating OTT services and on-demand products, making it the only one-stop shop for video entertainment in Sweden.”
We also continue to build our integration for operators of traditional video and next-generation video into what is the only true advanced television bundle of all content from all sources. For example, Netflix continues to be integrated into the TiVo cable set-top box experience with a number of U.S. operators, a list which now includes Atlantic Broadband, Cable One, Grande Communications, Suddenlink Communications and RCN, Midcontinent Communications, and GCI in addition to European operators Virgin and Com Hem.
Highlighting the success of our efforts in this area Netflix’s CEO, Reed Hastings and CFO, David Wells noted in their July letter to shareholders that MPDD would rather their customers use Netflix on their TiVo set-top and remote than to use Netflix on internet set-top such as Apple TV, partially because that drives the pay-per-view consumption for the respective set-top owner. Additionally Netflix noted that the Netflix app on Virgin media set-top boxes in the UK which are powered by TiVo continues to be a compelling streaming experience that delivers above medium viewing and satisfaction.
Moving on in terms of Digitalsmiths, existing deployments continue to scale and Digitalsmiths has grown both the number of households where Digitalsmiths’ core product, Seamless Discovery, is live and the transactions it processes. Additionally, Digitalsmiths continues to be recognized for their technology, and this January during the International Consumer Electronics Show will receive an Emmy in the Technology & Engineering category for their work in personalized recommendation engines for video discovery for multichannel video programming distributors.
On the TiVo-Owned front, in the second quarter we saw a 35% year-over-year increase in TiVo-Owned gross additions, even with close to a 30% decrease in total acquisition costs compared to the prior year. We believe our success is the direct result of our innovation and best-in-class product, a notion that continues to be reinforced by industry pundits. PC Magazine writer Sascha Segan in a June article wrote, “The best DVR out there is the TiVo Roamio, not only excellent reliability and a near-perfect program guide, but the holy trinity of Netflix, Hulu, and Amazon to make your viewing complete.
Also on the TiVo-Owned front, Xfinity On Demand from Comcast for TiVo Premiere and TiVo Roamio retail customers is now available in all Comcast markets and we are generally seeing strong sales in those markets. Further, building on our relationship with Comcast, we recently reached an agreement whereby Comcast will ensure that all our CableCARD-enabled devices will continue to have access to all linear channels and Xfinity On Demand in all digital Comcast markets and that Comcast will work with TiVo on a future two-way non-CableCARD security solution that will enable TiVo retail devices to access the full-Comcast lineup of linear and VOD program.
We anticipate that, at some point, Comcast will transition its delivery of cable signals to IP and this agreement assures that future TiVo devices will be able to receive all cable channels when that IP transition occurs. We believe this agreement improves our position in the retail market going forward and increases potential upside. Additionally TiVo strongly believes that the cable operator package of linear, VOD, TV everywhere and over the top content is by far the best approach to the television consumption experience but we also recognize there are a subset of consumers that don’t have or want an operator subscription and for those TiVo provides an over the air option to access the content they want whenever they want it.
To that end, we’re marketing in select best-buy stores and offering for over-the-air customers that want TiVo. Thus as we announced yesterday, we’re testing a specially marked and priced TiVo OTA offering. A lot was made of Aereo’s technology and what it means for the television industry, with certainly a tremendous amount focused around Supreme Court ruling involving Aereo. But all the while a legal solution for over the air programming is and always has been available it’s TiVo. As a matter of fact, TiVo had more television and tenant consumers accessing over-the-air broadcasting television than Aereo did when they disclosed customer accounts.
In addition, we will be evaluating different ways to achieve a more compelling whole home offering, targeting markets where our domestic operating partners don’t offer TiVo. The TiVo Mini is gaining traction as a product that gives people an economical way to enjoy advanced television throughout the home and we’re exploring pricing mechanisms that will make that even more attractive. We are confident that both our MSO and TiVo-Owned offerings will only get stronger as we continue to innovate putting the pieces together to achieve the ultimate experience for the TV viewer.
Our focus on mobilization, personalization and organization is working, as TiVo customers have more programming choices customized according to their user defined preferences and accessible from the cloud across different devices, regardless of location. In the next 12 months we will show that the approach of our labor when we roll out some very exciting product enhancements.
In the meantime, this quarter we made progress developing these innovative solutions, including implementing Haxe, the multi-platform programming language which increased performance in our TiVo premier boxes by about 25% and should enable us to implement future, multi-device innovations far more easy. And we are doing all this while reducing our R&D spend by 5% compared to last quarter’s and year ago levels.
We also continue to continue build out our data capabilities, to provide advertisers with unique ways to manage their television buying efforts. And example is our current, with our recent partnership with Datalogix a company that helps online digital advertisers measure offline sales where TRA users Datalogix’s capabilities to bolster its television purchase data. This relationship as well as many of our other data efforts highlights the value of set-top data, especially in the fast developing programmatic buying area, where we are finding the role of advanced analytics to be critical to the way advertisers are navigating this fast developing area of advertising.
On the capital allocation front, we have made meaningful progress in our efforts to deploy our significant cash resources to drive value. We’re taking another step forward by announcing a new 350 million stock repurchase program over the next 2.5 years with the intention to repurchase the 100 million of stock during our current fiscal year. This decision was a product of our thorough assessment of numerous capital deployment opportunities and the continued view that our business has significant upside potential, as we continue to innovative and drive subscriber growth.
The new repurchase program will replace our prior authorization and will bring our total repurchases upon completion of this space to well over $0.5 billion and will have significantly reduced our shares outstanding. In parallel with this buyback plan we’ll continue to evaluate additional ways to deploy cash to drive growth and value for shareholders including continuing to explore additional share repurchases, smart our M&A opportunities and to invest organically were appropriate.
In summary, this was another solid quarter for TiVo. We are continuing to execute strongly, deliver improving financial results and advance our product offering, all of which is supported by the attraction we’re seeing from operators both domestically and internationally. With a robust pipeline of international and domestic opportunities a continued push to drive innovation, a more efficient cost structure and smart deployment of cash, we are confident TiVo will deliver strong future financial and operating performance in the quarters and years to come.
With that, I’ll turn it over to Naveen.
Thank you, Tom and good afternoon everyone. I’m going to start by providing some additional color on the Q2 results, touch briefly on the capital allocation plans announced today and finish with a discussion on expectations for Q3 and beyond.
Q2 was another solid quarter of growth, our service and technology revenue grew 13% year-over-year to 86.6 million despite some delays in expected revenue recognition on certain operator development work projects. Importantly, several components of service and tech revenue grew at a substantially higher rate than the aggregate amount. MSO service revenue for instance posted a 37% year-over-year increase and we also saw a 32% increase in Digitalsmiths revenue from the first quarter.
Our adjusted EBITDA for Q2 was 29.9 million and came in at the top-end of guidance, while net income exceeded our guidance range. Driving this performance was a 5% sequential decrease in R&D and a higher than expected hardware margin. It’s important to note that the year ago quarter included several non-recurring items from the Cisco/Motorola settlement, including 108.1 million in litigation proceeds and 0.7 million of litigation expense, 752,000 in interest relating to past damages and approximately 167 million tax assets. Excluding these items both adjusted EBITDA and net income had significant year-over-year growth with adjusted EBITDA growing 73% year-over-year on this basis.
Shifting to our subscription metrics, in Q2 we grew our total subscription base to 4.8 million this includes net additions of 283,000 subscribers in our MSO business representing about 20% growth relative to the year ago quarter. As expected net MSO adds were down on a sequential basis due to summer seasonality during which operators tend to be less aggressive acquiring new subscribers.
We continue to see strong growth in domestic subscription where net additions for mid-tier cable operators were up 44% year-over-year and represented close to one-third of our total MSO additions. International net additions also grew slightly year-over-year and represented two-thirds of MSO additions. As a reminder, a good portion of the service fees from international MSO subscriptions continue to be recognized in technology revenue that we expect service fees from ONO to shift from technology revenue in the service revenue in Q4 of the current fiscal year providing a meaningful lift to MSO service revenue.
In the TiVo-Owned business, our gross adds were up 35% year-over-year as consumer reception to Roamio and our whole-home solution continues to be very positive. With the higher gross adds along with our intentionally limited marketing spend during Q2 which is a seasonally slow quarter drove our total acquisition spend down approximately 30% versus the year ago quarter. We expect to see a sequential increase in gross additions in Q3 driven by seasonality and increased marketing spend as we near the holiday season during which we plan to launch and test several new marketing and pricing initiatives. This is expected to lead to total acquisition cost next quarter that are up sequentially and slightly higher than Q3 of last year.
Moving to the balance sheet, our overall cash position increased by 40 million to 782 million from Q1, this was primarily a result of our annual DISH licensing payment and to a lesser extent reflects positive changes in working capital. As Tom discussed, we plan to return almost half of our current cash to shareholders in the form of stock repurchases over the next 2.5 years beginning with 100 million during the remainder of the current fiscal year. Our recent buyback activity has reduced basic shares outstanding by almost 10% over the last 15 months and our new buyback will further that trend providing our shareholders with more exposure to the upside potential of our core business.
In parallel with the execution of this repurchase program, we will continue to evaluate additional steps to accelerate growth, drive increased shareholder value, and make our capital structure more efficient. As we said before, this may include additional repurchases, organic investment and/or M&A to the extent we’re able to identify acquisitions that fit our previously described criteria, strong strategic fit, demonstrable market traction, high growth potential, strong incremental market characteristics and reasonable size.
Now getting to our guidance, for the third quarter of fiscal 2015, we expect service and technology revenues of 86 million to 89 million. We expect adjusted EBITDA to be in the range of 25.5 million and net income to be in the range of 6 million to 9 million. The largest expected differences between Q2 and Q3 are the increases in TiVo-Owned acquisition spend, which should yield an increasing gross additions in Q3 but also lower absolute hardware margin. The lower hardware margin is a combination of margin decreases in TiVo-Owned hardware as we increased shipments into the channel, and a decrease in overall MSO hardware margin due to supply constraints.
Looking at Q4 as I stated earlier in my remarks, we do expect to see a step up in our MSO service revenue due to ONO shifting into service revenue and several MSO launches including Cogeco, Blue Ridge and Vyve happening towards the end of the year. We also anticipate continue growth in media services revenue driven by Digitalsmiths. These revenue improvements will be somewhat offset in Q4 by our typical holiday related TiVo-Owned marketing effort where we expect total acquisition spend to be in line with the year ago holiday season.
Finally looking to fiscal 2016 and beyond, we expect our MSO and Digitalsmiths businesses to continue to drive meaningful revenue growth. Additionally, we think our TiVo-Owned business has upside potential which we hope to unlock through some of the initiatives we’re testing in the back part of this year and beyond. We believe this growth along with further R&D efficiencies, other potential cost structure improvement and share repurchases should drive strong earnings per share growth.
And with that, let’s now take questions.
(Operator Instructions) Your first question comes from the line of Rob Sanderson with MKM Partners. Mr. Sanderson, your line is open.
Operator, let us get the next question.
Your next question comes from the line of Jim Goss with Barrington Research.
Jim Goss - Barrington Research
Hi, I was curious about the announcement about the 49, 99 over the top box, what your rollout expectations would be on that and what sort of economics you expect to again relative to other Roamio devices?
Thanks Jim. The operating of an over-the-air device is really something that we had for a while haven’t put any marketing muscle behind it but interestingly about 30% of our retail subscribers have discovered TiVo and used it for an over-the-air antenna play and with the Aereo publicity which was enormous relative to what would have thought a new technology supreme court decision would have driven there clearly is a high degree of interest there, you see different estimates in terms of the number of over-the-air antenna households range from the 10 million to 17 million spectrum in terms of how many households do not have an operator subscription of some kind and gain their television that way. Obviously we don’t need to penetrate that substantial amount of that potential audience that have a significant uptick in our overall retail subscriptions.
We don’t really have a clear view of how many appetizers is for this based on the press that the Aereo issue received and quite frankly the press we received from putting out the announcement we did yesterday, there is obviously an active amount of consumer interest here. The subscription revenue was equivalent to what we see by way of subscription revenue on our other Roamio so, beyond the fact that there is a little heavier hardware subsidy involved in the upfront given the lower price of the box which is really a test for us at about 500 best-buy stores to see what kind of take rate and traction there is. The subscriber revenue going forward would look pretty similar. So, I think next quarter we’ll have a better idea of really what kind of appetite there is out there but the amount of interest that it has stirred is quite substantial.
Your next question comes from the line of David Miller with Topeka Capital Markets.
David Miller - Topeka Capital Markets
Naveen, I’m trying to figure out and I apologize if you maybe explained it in your prepared remarks but I’m not exactly clear on why you guys came in at the low-end of your guidance, usually you guys are excellent prognosticators of your own business, I would say actually one of the best in the universal companies that I follow, and you usually come in sort of at the mid to high point this time it was the low point, you guys -- I mean everyone knew about the seasonality issue going in I’m just wondering, what might have come up intra-quarter that caused you to hit the low-end versus the high-end, any granularity you can provide will be great? Thanks.
Yes, hey David thanks for the complements on our prior record there.
David Miller - Topeka Capital Markets
You bet anytime.
In reality I don’t think we are inconsistent in any material way there importantly for this quarter we were above our guidance range on both net income and adjusted EBITDA, the one number where we were towards the lower end of guidance was revenue and the reason for that is, you may remember our service and tech revenue incorporates a component of the NRE work that we do every quarter for various operators. And revenue recognition on that component is somewhat unpredictable it’s a function of ultimately when the work gets done, when it gets tested, accepted things of that nature. So, that’s the one piece that was a little lighter than we expected in the quarter but other than that everything was right on track.
And service revenue component of that was very much in line with our expectations.
Your next question comes from the line of Brian Klein with National Alliance.
Brian Klein - National Alliance
Hey guys, thanks for taking my call. A couple of quick ones if I could on the MSO front, you sort of gave us a feel for MSO your progress on certainly on the growth front but you talk a little bit about churn maybe give us a feel for where that is perhaps relative to standalone and also versus your own expectations?
Yes Brian it’s Naveen. So on MSO all the numbers we report are net numbers so we don’t really report a churn rate per se we have some anecdotal information from our customers regarding overall churn and it looks pretty similar to churn they see in their multi-room DVR installations. So, in terms of projecting out our subs and our revenue I think if you look at our trends keeping seasonality in mind, you don’t really have to worry too much about the churn itself.
Your next question comes from the line of Rob Sanderson with MKM Partners.
Rob Sanderson - MKM Partners
Yes, good afternoon, sorry about the malfunction earlier. I’m interested in the code migration that was rolled out over the summer and particularly the multiplatform capabilities, what does this do for the company that was not possible or practical previously? And could this pave the way though a more significant retail strategy overtime?
Well, it is a software development process really for us that gives us a lot more flexibility in the porting and customization of our software, certainly for international language issues it provides a faster, easier, cheaper way for us to make progress, there are elements of how we can port our software to other devices that certainly makes for easier, cheaper development activity for us on which could be put to use in the retail front in terms of giving us greater flexibility there. So it’s an important element of our productivity and efficiency measures one that we have high hopes for being able to aid our overall development efforts, broadly both retail and MSO.
Your next question comes from the line of Eric Wold with B. Riley.
Eric Wold - B. Riley
Just one real quick follow-up question or I guess my main one. Just one on David Miller, I am talking about NRE that was delayed, has that been recognized in this quarter and will that include in the current quarter guidance is that still kind of lingering out. And then my main question is, kind of, thinking about the strong pipeline, you’ve got that you referred to in the beginning, I am not looking for specific names in that pipeline, can you give us some sense of, if it is a strong, that kind of magnitude of that pipeline and when you think, someday it will start to come to fruition?
Yes. So, on the first question, Eric on NRE without speaking to any specific projects, generally things that we expected in Q2, that we for whatever reason saw some sort of delay. We do roll that into subsequent quarters, unless there were some specific reasons we know of, that it is not going to happen. So yes, our guidance for Q3 does take all that into account, but keep in mind that the tech revenue, the NRE component excuse me does have a lot of volatility in it. So you will see some quarters, where that’s a bigger number and some quarters where it’s a lower number just based on the amount of, kind of, customer integration work that we’re doing.
On the -- the second part of the pipeline question, we -- as you know can’t give you a tonne of specifics. But as I said last quarter, I think one of the reasons we felt like the pipeline was robust is that we were involved in a number of discussions at various stages, some more preliminary, some more advanced. And we also said that the challenging part is handicapping at what point do those discussion ultimately turn into things that can be announced publicly. And I think a lot of that characterization still remains true, a lot of active discussions. I think one of the things that makes us feel particularly confident in some of those opportunities is the fact that we got irons in the fire on a number of difference dimensions. We’ve got discussions that cover multiple geographies and you have seen some of the benefits of that with the announcement this quarter of Cogeco our first major operator in Canada.
And I like what I see in terms of additional geographies in the pipeline. We got a lot of different products that we are discussing with various customers through the combination the things we’re doing with our traditional TiVo offering, Digitalsmiths and then some of the, kind of, unbundling of our various products that we have discussed in the past. And I think, we have got an increasing variety of the types of customers that we are in discussions with. We’ve obviously, historically been very focused on the cable universe, but think there are some interesting opportunities for us to go beyond that, going forward as well. So a combination of those things makes us quite bullish on the future.
Just to further, that thought. The pipeline from our point of view has never been stronger and that is not coming from any particular size of operator, meaning the large operators to mid size operators to small operators there we’re seeing operators of all sizes, showing stronger interest than before and what’s very interesting to see is how operators, who weren’t originally thinking the direction of TiVo being their solution provider, rethinking previous choices they made in terms of where they go to a get a solution and looking at TiVo as a better and more logical higher quality future path and that rethinking process is something that’s new to what’s going on out there, the combination of all those things, really gives us a sense that we have become the leader in providing advanced television solutions for those who are looking for a third-party who can provide it and not doing it internally themselves.
Your next question comes from the line of Brian Fitzgerald with Jefferies.
Brian Fitzgerald - Jefferies
Thanks guys. Let me question around what we call your expansible products things like TiVo Mini, TiVo Stream can you talk, are you happy with the progress you’re seeing there in terms of both the customer adoption and carrier adoption, any penetration rates any additional color there would be great? Thanks.
Well the home product has been a major step forward for us operators are increasingly implementing the whole home solution. It was a major piece of the suite that they wanted to see from us because it obviously lowers the CapEx cost in the home and we’re seeing substantial MSO deployment of the Mini retail we’re seeing that it has some traction that we’re going to be exploring some whole home price point possibilities to assess whether there are better ways to penetrate the retail adoption there since it does seem to be a popular -- have popular potential on the retail front as well.
Stream having been integrated into our core Roamio skews is something that we see an increasing amount of usage of our mobility functionality. And when we see both reviewers and consumers really embracing elements of TiVo in terms of higher usage is that ongoing use of the streaming capability that rates very high in terms of what people are using day-to-day on the lower end skew Stream can be used including into the OTA device which is an interesting way for the kind of mobility that Aereo was trying to give people in terms of moving content to other devices that they are able to adapt on the OTA front and we’re going to take a hard look in terms of seeing how that is used with respect to the TiVo OTA device.
Your next question comes from the line of Barton Crockett with FBR Capital Markets.
Barton Crockett - FBR Capital Markets
I was interested in the share repurchase and the cash balance the 350 million you’re announcing is of course half of the cash you have right now. But obviously you’re getting some more licenses of these and the business continues. So I was wondering if you can give us a sense of as you execute on this plan. Do you see your cash balance declining materially or do you have enough kind of business in the pipeline, you think you’d still be able to hang on to the cash balance over the next three years?
Well we’re not going to project what the future cash is obviously the opportunity for additional cash coming into the business is clearly there. We were looking at our current cash resources and assessing an ongoing balanced approach we’ve been very balanced, we think in terms of returning cash to shareholders through buyback and continuing to have sufficient capabilities to do in depth M&A assessment obviously has been very cautious on the latter front but where we do see something that has the characteristics of what Naveen laid out earlier we do want to make sure that we do have the resources to be able to move forward on M&A possibilities.
And we’re very much continuing that balanced approach, we think we will have sufficient fire power on the balance sheet to be able to assess those possibilities but I wanted to step up the level of commitment in terms of cash associated with buybacks because we believe that we should put a more prominent stake in the ground relative to that cash usage as well, obviously looking to spend $100 million over the next five months in terms of buyback is a more aggressive move for us on that front. But overall we think we have the balance and we have the ability to continue to assess opportunities that may arise.
Your next question comes from the line of Tom Eagan with Telsey Advisory.
Tom Eagan - Telsey Advisory
A couple of question, two for you Tom and one for you Naveen, first Tom what conversations have you been having regarding the 2 million fiber houses in Spain. Secondly what have you been hearing from European cable operators about the defending against Netflix’s expansion?
On the Netflix front we have generally found that operators are interested in having a branded streaming service included in their bundle, we’ve obviously accomplished that already in both the Virgin footprint and we’ve also done that with the Scandinavian operator Com Hem. And having built on that early success abroad we brought that notion back into the U.S. where as you know for so long it was a question of cable doesn’t want to see anything having to do with over the top time and that is the demise of cable has to resist over the top time and in fact our vision of battle along has been cable has got the greatest strength to be able to include over the top time tenants part of its bundle because with all this investment in broadband and being the leading provider of video packages the combination there gives consumers the full ability to have a great viewing experience, if they have a interface like ours which incorporates all of it.
And in fact now we have five or six cable operators in the U.S. who are incorporating Netflix in their bundle. And I think that’s probably the more natural way to see what’s going to develop overseas as well as in the U.S. in terms of the inclination to be more inclusive in the cable bundled not less relative to the fiber homes in Spain that’s really bit too early to fully asses where that goes, but obviously something where we’re focused on.
Tom Eagan - Telsey Advisory
Alright, thanks. And then for you Naveen, what are you currently seeing regarding hardware revenue, are you still seeing revenue declines in that space and thus pulling down revenue expectations in that space going forward?
Well, you have to think of hardware in two components. We’ve obviously got the TiVo retail business that has a material hardware element and then the MSO hardware revenue. And those businesses work a little different. In the retail piece, hardware margins tend to be negative so the more subset we generate in any given quarter. We tend to incur higher hardware losses, which obviously dilutes our overall hardware margin which is the combination of both the MSO piece and the retail. Some of the comments we made in the prepared remarks were intended to bring color to the fact that as we get into the back half of the year in the holiday season where we typically expect to see growth in retail subs and we obviously mentioned we’ll be allocating more of our marketing spend to that part of the year. We would also expect to see higher hardware loses out of the retail side.
On the MSO side, this quarter was played out a little better than we expected. We had higher sales into MSOs. And that one in the long run has been a little difficult to predict and we have generally told you that overtime we expect MSOs to use a variety of different hardware suppliers some may use TiVo some may not. And I think therefore we’re always little cautious about the MSO hardware piece. But right now it’s been strong and I think that’s an indicator of the speed with which some of these providers are deploying subs and making sure they have the hardware to support that. One other point there that we called out was when we looking at Q3 interesting it’s an areas where we probably have more demand from MSOs for our hardware than we likely to be able to fulfill. So we’re actually running into some inventory constraints there.
Your next question comes from the line of Mike Olson with Piper Jaffray.
Mike Olson - Piper Jaffray
Can you give us a slider for what kind of trend you think for MSO ARPU as we move into I guess maybe the second half of this year into next year? And just what would be the drivers for how that does or doesn’t change over the next few quarters? Thanks.
Well, the key variable there is major MSO sub-growth coming out of ONO and Com Hem is not yet reflected in the service revenue line given where we’re in the overall deployment and NRE recovery curve. So that when that happens, you have subs coming in and revenue not being reflected and it reflected that helps bring your overall MSO ARPU up so come the last, the latter part of the year you’ll begin to see that phenomena kick in.
Your next question comes from the line of Heather Bellini with Goldman Sachs.
Shakeel Alam - Goldman Sachs
Hi, this is Shakeel Alam filling in for Heather. Thanks for taking my question. I have a question on penetration rates. The rates of Virgin ONO are still tracking nicely than after passing the 50% mark, do you have any visibility as to when you could start seeing the slowdown could be 70% or 80% or is this more of a wait and see? And then separately could you just give us any early thoughts and how we should think about the ramp at Cogeco and that starts next year? Is there any difference why that should be drastically different than Virgin or ONO in terms of adds and penetration?
Well, we can’t really speak to what the marketing plans are for MSOs individually. We got to let them do that, we do see that Virgin and ONO continue to roll out at nice levels but at the same time the international contribution of subs relative to our total quarterly sub-growth has come down some which is also a function of course of domestic MSOs beginning to kick in more. Our overall penetration of the 10 million to 11 million homes that we now have under contract is in the 30% area more heavily weighted toward international than domestic in terms of that 30% penetration.
And the domestic penetration is in the order of about 5%. So there is a lot of headroom in terms of that distribution to come and what’s important about that is we have talked about in the prepared remarks, we’re seeing ARPUs on average in that domestic front of about $2 per sub per month. And so the revenue kick in as the domestic distribution penetration begins to grow and begins to accelerate at levels that we’re nicely seeing in the international front there is a lot of revenue upside on the MSO front that will flow from that and I think that’s an important financial consideration to keep your eye on.
Your next question comes from the line of Richard Tullo with Albert Fried & Company.
Richard Tullo - Albert Fried & Company
Yes, hi guys, thank you for taking my question. My first I guess just one question, my question is do you have any plans on buying Aereo account list? I think it was somewhat small at 7,000 customers but wouldn’t probably make an impact on the offer that you have in the marketplace right now. And in addition to that, is that the kind of scale you’re looking at for this new product or do you think it scales to 5% to 10% of that 10 million market of wireless TV users?
On the question of those acquiring Aereo we don’t talk about specific M&A opportunities on a speculative basis but I can say that, the core spoke pretty clearly that, that was not a legal approach to how this particular market could be served and we wanted to make sure that, that potential customer base understood there was both a legal way to do it and quite frankly a more elegant way to do it in terms of our interface and the integration about over the top content and the combination of those things is something that we think will be important as more of the market understands it.
As I said before we don’t really have a good sense of what the penetration possibilities are, the number you threw out in terms of Aereo’s presumed sub count is a number that we already exceed in terms of our number of subscribers that are over-the-air and tenant users of TiVo. So, in that sense I think we’re talking about the opportunity to scaling way that Aereo haven’t yet but what the potential for that is, is some that we hope that the test within the best-buy stores at the price point that we’re putting it out now will give us a better sense of.
Your next question comes from the line of Edward Williams with BMO Capital Markets.
Edward Williams - BMO Capital Markets
A couple of quick questions, can you comment a little bit about what your thoughts are with regards to kind of a minimum cash balance that you’d like to keep on your balance sheet? And then secondly, as you look at Digitalsmiths, can you give us a sense as to how it’s been progressing thus far and how we should think about it as we look into calendar 2015?
Well in terms of how it’s been progressing financially, it has a strong double-digit revenue growth quarter-over-quarter I think the more MSOs understand how it takes about 80 metadata fees and synthesizes them into a ways drive the user interface of operators in the case of most of their customers large operators who need to have some type of cloud-based service that is really capable of giving their next-generation user experience the kind of depth and robustness that Digitalsmiths has, it’s gaining more and more adherents in terms of what it does for both multi-screens as well as the core television set experience. So it is something that we have a lot of faith in as they wait for us to relate to operators who may not find the full TiVo staff something that they need to deploy in terms of their own plan.
We think there is a lot of opportunity for it internationally that’s not an area that Digitalsmiths has focused on and it’s going to become much more aggressive in terms of its conversations with international players who again may not find the full TiVo stack is something that they can handle or afford but still need a way to power the next-generation interface that they have. It really gives us a degree of modularity to our overall MSO offering where a key component can be used and hopefully built upon into some of that is even broader than Digitalsmiths is today to have a less expensive, more easily deployed product that can fuel a lot of cable operators that the full staff may not be available to.
Edward Williams - BMO Capital Markets
Okay, on the cash balance?
On the cash balance side, obviously we believe we have sufficient cash resources given the buyback that we’ve announced the available cash balance is something that we continue to evaluate and it’s something that you look at based on the various factors that we consider at a Board level from time-to-time, there is obviously minimal levels of cash you want to have for operating purposes minimal levels of cash you want to have to be able to be flexible enough to take advantage of M&A opportunities that may arise and obviously we’re now becoming the central backbone to the offering, core offering of companies worth billions and billions of dollars and they do like to see that there are cash resources at our disposable and they are dealing with a fundamentally, financially strong company and obviously that become some consideration as well. But as I said we continue to approach this on a very balanced basis and think the aggressive buyback we’ve announced coupled with the cash resources that remain there for us is a good balance.
Your next question comes from the line of Daniel Ernst with Hudson Square.
Daniel Ernst - Hudson Square
Yes. Thanks for taking my call. One quick housekeeping question and then a follow-up where is the cash balance or the outstanding balance on your previously won awards but not yet received payment stand. And as a follow-up question they were asked about the pipeline, has there been any change in conversation or direction with ONO post the transaction with Vodafone positive or negative and on the positive side, have you explored the opportunity for accessing Kabel Deutschland which they already own? Thanks.
Well, without commenting on any specific discussions because that’s not something we do obviously I will say that Vodafone acquired ONO and ONO is performing really well when it comes to TiVo and obviously that’s been viewed positively by Vodafone. So we like to see that on the cash side, Naveen.
Yes. It’s in the press release on some of the tables that are attach there, but just to give you the number the remaining cash that has not yet been received in the existing settlements is little over 300 million, 306 million I believe.
Plus the AT&T upside.
We have reached our allotted time for questions. I would now like to turn the call back over to Tom Rogers for any closing remarks.
Thank you. Well, this was a really strong financial quarter for us. It was the highest EBITDA and service revenue quarter ever for the Company when you take out the effect of litigation settlements in certain past quarters. The product has really never been stronger both in and of itself in compared to when others are trying to do out there. And our OTA product is the latest example of that. The deployment of cash that we've announced has never been more pronounced in terms of our intentions to drive shareholder value with the buyback that we have announced here. And all of which continue to drive our leadership position in the provision of advanced television which we are feeling very, very good about. Thank you everybody for tuning in, in late August. And have a great Labor Day weekend. Thanks again.
Thank you. This does conclude today’s conference call. You may now disconnect your lines and have a wonderful day.
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