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TiVo (NASDAQ:TIVO)

Q1 2012 Earnings Call

May 24, 2011 5:00 pm ET

Executives

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

Thomas Rogers - Chief Executive Officer, President and Director

Naveen Chopra - Senior Vice President of Corporate Development & Strategy

Derrick Nueman -

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

Analysts

Anthony Wible - Janney Montgomery Scott LLC

Edward Williams - BMO Capital Markets U.S.

Alan Gould - Evercore Partners Inc.

Barton Crockett - Lazard Capital Markets LLC

David Miller - Caris & Company

Richard Tullo - Albert Fried & Company, LLC

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the TiVo First Quarter 2012 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Mr. Derrick Nueman, Head of Investor Relations. Sir, you may begin.

Derrick Nueman

Thank you, and good afternoon. I'm Derrick Nueman, TiVo's Head of Investor Relations. With me today are Tom Rogers, CEO; Anna Brunelle, CFO; Naveen Chopra, SVP of Business Development and Corporate Strategy; and Matt Zinn, our General Counsel. We are here today to discuss TiVo's financial results for the first quarter ending April 30 this year. We have distributed a press release and 8-K detailing our financial results. We have also released a financial and key metric summary which is posted on our Investor Relations website. Additionally, we will post a recording of this call later today. The prepared remarks today should take 25 to 30 minutes and will be followed by a question-and-answer session.

Our discussion today includes forward-looking statements which relate to, among other things, TiVo's future, business and growth strategies; profitability and financial guidance; scope, timing of distribution of TiVo services domestically with DIRECTV, Charter and other operators and internationally, in the U.K. with Virgin Media and another reason; the financial value and strength of our intellectual property portfolio; and the future results of TiVo's litigation involving AT&T, Verizon and Microsoft; TiVo's intent to protect and defend its intellectual property; future TiVo products and services including multi-room and non-DVR devices; consistent growth in both our direct and retail consumer channels and our television division distributor channels both in the U.S. and abroad; and the expected future increases in research and development costs and legal-related costs. You can identify these statements by the use of terminology such as guidance, believe, expect, will or similar forward-looking terms. We caution you not to put undue reliance on these forward-looking statements as they involve risks and uncertainties that may cause actual results to vary materially from our forward-looking statements. Factors that may cause actual results to differ materially include delays in development, competitive service offerings and lack of market acceptance, as well as other factors described under Risk Factors in our public reports filed with the SEC, including our latest 10-K and 10-Q. Any forward-looking statements made on the call today reflect analysis as of today, and we have no plan or duty to update them. Additionally, some of the metrics on today's call are non-GAAP measures. Please see our reconciliation sheet which is posted on our Investor Relations website.

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

Thomas Rogers

Thanks, Derrick. Good afternoon, everyone. This has been a memorable quarter for TiVo. First, we clearly demonstrated the value of our intellectual property. And second, we clearly demonstrated leadership in providing advanced television solutions to operators with the recent Comcast announcement being our latest example of our leadership in this area.

As to our intellectual property, we finally reached the highly successful resolution in the DISH litigation, which we believe has established the strong value of our patent portfolio. Additionally, our growing number of operator deals continues to demonstrate the value of the investments we have made in these areas. In so doing, we have also further distinguished the TiVo experience as the most comprehensive way to enjoy the rapidly evolving world of consumer entertainment options.

Let me provide some perspective on these important milestones, starting of course with the historic $0.5 billion settlement with DISH Network. In combination with previously collected damages of over $100 million, the total monetary compensation paid to us for use of our DVR Time Warp patent by DISH exceeds $600 million, putting it in line with the well-publicized Blackberry RIM NTP settlement. It goes without saying that reaching a settlement of this magnitude with one of the industry's toughest defendants underscores the fundamental nature of our intellectual property and sets a precedent regarding the strength and enforceability of our intellectual property to others in the industry while also proving the significant monetary value that can flow from aggressive enforcement of our IP assets.

More immediately, the settlement yields some highly attractive economic benefits in addition to establishing a recurring stream of high-margin licensing revenue. We expect the dismissal of the DISH litigation to result in a reduction of roughly 20% to our FY '12 legal expenses. The combination of licensing revenue and expense reductions will significantly enhance our adjusted EBITDA in the current fiscal year and beyond.

Also on the litigation front, we scored a victory several weeks ago when a Microsoft retaliatory action in the Northern District of California was stayed, pending a Patent and Trademark Office review of the patents asserted by Microsoft. We believe that it's likely the PTO review will lead to the invalidation or narrowing of claims of one or more Microsoft patents.

Recall that we are also granted a stay of the AT&T case against TiVo in the Northern District of California earlier this past quarter. These 2 stays allow there to be greater focus where it should be, on the upcoming claim construction hearings against AT&T, Microsoft and Verizon in the Eastern District of Texas, where we believe we are in a strong position as AT&T and Verizon have uniquely focused on building their respective television services off of the DVR and our critical Time Warp technology.

At the end of the day, we have no doubt that we can derive further shareholder value by moving forward with an aggressive strategy to defend our intellectual property from being infringed upon by others as the value derived, thus far, with just one patent asserted against one party.

With the inflow of significant capital from the DISH settlement, many of you have asked how we plan to deploy our sizable cash resources. While I believe we were more than adequately capitalized prior to the DISH settlement to fund our organic sales and marketing and research and development efforts, the additional cash opens up even more options for driving growth and maximizing shareholder value.

We're currently assessing all such options and are committed to act in the best interest of shareholders as we weigh alternatives, including the possibility of a share buyback, given our belief that the potential of our distribution deals and intellectual property licensing is not adequately recognized in our current stock price.

While this has obviously been a headline for the quarter on the litigation front, it is important to remember that our intellectual property program is but one part of TiVo's long-term growth strategy. In fact, this past quarter, we saw important developments in our efforts to expand TiVo's footprint as we continue to win new distribution deals and as some of our previously signed deals enter the deployment stage.

Specifically, we recently entered into a new agreement with Comcast to allow us to pursue a different, more efficient path to offer an advanced television solution to Comcast customers. Rather than continue to be limited by the notoriously slow pace of cable middleware development as was the case under our previous agreement. We agreed to turn our U.S. retail platform into a truly all-inclusive digital cable set-top box by enabling Comcast's extensive library of Xfinity TV On Demand content on TiVo Premiere set-top boxes either currently owned or purchased at retail in the future.

Comcast will provide marketing support and free installation of TiVo Premiere boxes for its customers in these markets. With video on demand from Xfinity, which includes content from all 5 major networks joining the millions of content choices currently available through TiVo, this product becomes the only way a cable subscriber can get traditional linear television channels, video on demand from the operator and the best in broadband content from Netflix, Amazon, Hulu Plus, YouTube and Blockbuster all in one box, one user interface and one remote control. In our view, there's simply no other solution in the marketplace that is as complete and comprehensive.

Comcast has also agreed to put significant marketing muscle behind this offering, including direct mail, television spots and other media in order to help drive demand from their subscribers. While this is a more rapid route to deployment, enabling cable VOD on a retail set-top box is a nontrivial effort. And TiVo is uniquely positioned to offer such a service given our extensive experience working with a variety of cable infrastructure environment.

On the International front, the full launch of Virgin Media's TiVo product is now underway and the early results have been very promising. Virgin Media has noted that it received 65,000 preorders for the service, reflecting an unprecedented level of early interest for any U.K. cable product, which Virgin is in the process of fulfilling.

During Virgin's most recent earnings call, Neil Burkett, Virgin's CEO had several notable remarks regarding TiVo. And I'm quoting here, "It's a huge achievement that from the day that we decided that we were going to use TiVo as our middleware to the day that it was working and we launched, it was just over 12 months." He also went on to say, "There has been strong early interest for our next-generation home entertainment service, Virgin Media powered by TiVo. And we anticipate consumer demand for this will grow as we accelerate our rollout. Through TiVo, we're the first major operator to launch a TV service that will ultimately reside on every one of our customers' TVs, PCs, tablets and mobile devices. It will be the glue that brings together the TV, the social screen, the PC, the personal screen and the mobile, the remote screen whether that's a tablet or a smartphone. It will be a truly converged platform."

The progress at Virgin Media builds on the continuing momentum from RCN and Suddenlink and will be further enhanced to several other operators who will launch the TiVo offering later this year. The combination of these activities was a critical factor in achieving the significant sequential reduction in MSO/Broadcasters subscriber losses. Though we are at the very early stages of deployment with most of these deals, we are seeing them begin to offset the loss of subscribers from our legacy DIRECTV platform. We expect this trend to continue as our progress with Virgin Media, Suddenlink, Charter and others continue through the year.

Longer term, it is helpful to recognize the potential of these deals, which include operator provision boxes we have put in place over the last couple of years, which are generally distinguished by the selection of TiVo as the primary provider of the operators' next-generation platform.

In fact, we currently have these types of strategic deals in place with operators who have over 10 million subscribers. And each of these deals are typically structured with significant minimum deployment guarantees and/or agreements to distribute TiVo on an exclusive basis. The implication of which is that TiVo can expect more reliable subscriber growth from these deals unlike some of our legacy mass distribution relationships where TiVo was offered as an optional premium service.

In addition, these deals provide subscribers that not only generate significant revenue for our business over time but do so at a high margin once the initial development costs are recouped. These agreements, along with our deals with Comcast, Cox and DIRECTV, give us the opportunity to drive significant subscriber growth. And as we build scale, we have rights to derive additional revenue through incremental services like advertising and audience research, which should complement our recurring service revenue nicely.

Lastly, on the mass distribution part of the business, it's worth noting that we believe our current agreements are just the tip of the iceberg, and we see significant potential in future deals.

In the U.S. alone, roughly 30 million to 40 million households remain unaddressed by our existing distribution and licensing agreement. And internationally, it's an even bigger opportunity with close to 400 million global pay TV households where TiVo is just getting started. So the opportunity is very attractive, and we believe we're well-positioned to accelerate our sub-growth trajectory given our recent track record with international and U.S. operators and the consensus that TiVo is one of the top 2 major global competitors in this space. This, coupled with the fact that there's an urgent need for these operators to deploy a next-generation advanced television solution, positions TiVo very well for this major opportunity.

On the TiVo-Owned side of the business, our retail offering remains the most compelling option for universal television consumption and has tremendous potential to drive growth. We believe our recent retail cable deals have the potential to materially augment sales as they remove installation hurdles, provide marketing support and enable access to operator VOD libraries.

During the first quarter, we spent time taking what we know is a unique product offering and assessing various pricing and messaging points to ensure we put our best marketing foot forward. Consequently, we spent about 60% less marketing in the quarter as we assess the best path forward. This testing was to ensure the dollars were spent wisely and efficiently.

We continue to believe that consumers want easy access to an ever increasing sea of content, and we are focused on adding that content to the millions of content choices already available on TiVo.

We just announced the launch of Hulu Plus, giving TiVo Premiere subscribers access to its full array of content streamed instantly to their TV. This much anticipated offering is a key piece of the content landscape for TiVo Premiere and represents a huge win for TiVo subscribers who now have all mainstream content choices woven together in one unique user interface.

There is a lot of noise out there about TV Everywhere in multiple devices. While home and multi-room devices are something we are highly focused on, one must also realize that TV Everywhere does not address the very important concept of upgrading the look and feel of the television screen itself, the largest and most expensive screen in the house.

A year ago, many questioned the value of our patents and also whether the distribution deals we have been signing with operators around the globe would have a positive impact on our subscriber base. Today, we believe we've made significant progress toward answering both of these questions.

As you can see, our successful efforts in enforcing our intellectual property and the progress of commercial deployments under our various mass distribution deals, TiVo, we believe, sits in an enviable position with strong growth prospects. We are proud of what has been accomplished recently and look forward to what lies ahead for TiVo.

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

Anna Brunelle

Thank you, Tom, and good afternoon, everyone. As Tom mentioned, this past quarter was a historic one for TiVo with our $0.5 billion settlement with DISH Network and positive signs that our mass distribution efforts are beginning to take hold. We believe these efforts will significantly change our financial trajectory going forward.

Now let's start with details on our settlement with DISH, specifically how we are recognizing revenue now that we have the final accounting determination.

We have split revenue into 2 categories, past damages and future license revenue. During Q1, we recognized $178.6 million in litigation proceeds relating to past damages, of which $175.7 million are reflected in litigation proceeds in our operating expenses and $2.9 million is included in interest income. Going forward, we will recognize $44 million per year for the next 7 years in licensing revenue. This equates to roughly $11 million per quarter in revenues starting in the second quarter. Additionally, we expect our taxes to be minimal given our significant NOL position and our R&D credit. And we anticipate that we'll exit the year with close to $500 million in federal NOLs. And finally, we expect reductions in our litigation spend as compared to the guidance we gave previously.

Now getting into the quarter. Service and technology revenues were $38.8 million which exceeded the high end of our guidance range and were driven by higher-than-expected technology revenue relating to our Virgin deployment. Our cost of service and technology revenue was $15.8 million. Our hardware loss was $2 million, which included $1.4 million of net hardware loss and $600,000 of costs related to our retail channels.

Operating expenses were $57.2 million. The sequential increase was driven by higher litigation-related costs, some of which were incurred due to our settlement. These expenses totaled about $11 million in the quarter. Additionally, our planned investment in research and development increased operating expense as we executed on our efforts to enforce our intellectual property, innovate in the television space and game distribution.

Interest and taxes included a charge of $1 million for taxes and $500,000 in net interest expense, which led to net income for the first quarter of $139 million. This led to earnings per share of $1.21 using the basic share count of 115 million shares. On a diluted basis, our earnings per share was $1.04 using fully diluted shares outstanding of $140 million, which includes our convertible notes as if they were converted into approximately 15 million shares and excludes interest expense related to the convertible debt.

Additionally, our adjusted EBITDA was $149.4 million. Excluding the $175.7 million in past damages from the DISH settlement and related settlement expenses, our adjusted EBITDA would have been better than our guidance of negative $25 million to negative $27 million. Finally, we ended the quarter with $350 million of cash and short-term investments driven by $167 million in net proceeds from our convertible debt. Note that the first quarter's ending cash number does not include the $300 million we received from DISH on May 2. After including this amount, we have roughly $650 million in cash.

Now turning to our first quarter subscription metrics. In our TiVo-Owned business, our gross additions in Q1 were impacted as we continue to assess our new pricing plan. And as a result, that's roughly 60% less in subscriber acquisition marketing compared to the prior year. Further, our new pricing led to ARPU of $7.91, which increased from the prior quarter. We believe the TiVo-Owned ARPU will benefit more significantly from our new pricing plan as the year progresses. Finally, TiVo-Owned churn improved significantly from the prior quarter due to seasonality and our churn reduction efforts.

Our MSO/Broadcaster subscription base declined by 29,000 subscribers in the first quarter which was a significant improvement from last quarter. Contribution from our recently deployed distribution deals, including Virgin, Suddenlink and RCN, along with lower DIRECTV churn, led to this improvement and we believe this is a positive sign that we're not too far from turning the corner on MSO/Broadcaster subscriber growth, especially once other deals such as DIRECTV and Charter launch.

Before I get into the specific guidance for the second quarter, let me walk you through some changes since we last spoke. First, due to our settlement with DISH Network, we are now expecting a reduction in projected fiscal year '12 legal expenses of approximately 20% from our previous forecast. We have previously forecasted legal expense to double from the prior year's level of $23 million. However, we are still anticipating material spend in the second quarter due to claim construction hearings in the AT&T and Verizon cases, which are scheduled for early June. Second, our research and development expense expectations remain consistent with our prior expectations for the full year, and we are not expecting much growth from our Q1 level. We continue to believe that this investment will drive growth, further innovation and lead to more distribution. Third, we had some G&A expenses in Q1 related to the settlement that we do not expect to repeat going forward.

With that, let me get to our second quarter guidance. We expect service and technology revenues of $46 million to $48 million. This sequential increase is expected to be driven by DISH Network licensing fees. Additionally, we expect slightly lower technology revenues than the prior quarter. So we expect adjusted EBITDA to be in the range of negative $14 million to negative $16 million and our net loss in the range of negative $25 million to negative $27 million. Additionally, our earnings per share in the second quarter should be calculated using our basic shares outstanding which were $115 million in the first quarter.

To summarize, we believe the events of this past quarter have changed our financial trajectory. We executed on our efforts to enforce our intellectual property. We're innovating in the television space and gaining distribution. And we look forward to these efforts driving growth.

This concludes my remarks. Thank you for your time, and we'll now take questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Barton Crockett of Lazard Capital.

Barton Crockett - Lazard Capital Markets LLC

I was wondering if you could update us on the DIRECTV box rollout. Are you still expecting that this is something that will come out in the back half of this year? And in general, in terms of features, with DIRECTV and do your other deals offer support for multi-room DVRs, is that something that's not yet available for TiVo and third parties?

Thomas Rogers

Barton, in terms of DIRECTV, we're making real progress. We're getting close there. They are testing the product. We will launch relatively soon, I hope. Part of the reason that it's taking somewhat longer is a bunch of additional feature work that we were doing there. I can't comment on specific features of DIRECTV such as multi-room. Obviously, when it comes to our retail product and which is the basis of cable operator distribution, as you know, TiVo talking to other TiVos from a multi-room point of view has been around for quite some time. And we have specifically engaged with certain cable operators to make sure that a less expensive multi-room approach in terms of a whole-home solution is able to be implemented. Obviously, with client elements to that, it would be much thinner, much cheaper for operators to implement.

Barton Crockett - Lazard Capital Markets LLC

Okay. And then if I could step back and just ask one other question here. As I look at your business, I think as others look at it, there's a common assumption that the real opportunity here is in the third party deals. And we are not going to lean a lot on the standalone business as being much of a contributor. Do you see, though, an opportunity, based on the deals that you have today and not counting new deals but on the deals that you have today with the guaranteed minimums, the basis for EBITDA profits, in other words, do you think you'll get enough revenues from these deals to cover what you're spending on R&D and G&A excluding kind of the litigation costs?

Thomas Rogers

We believe that the combination of licensing revenue and operator deals over time can provide us a basis for profitability. That is not to say that the standalone business though doesn't play a role both in terms of efficiencies that it allows us to create with the operator business and a form of incremental revenue that most suppliers to the operator world can't even think of having since we've created the efficiencies between the retail standalone business from an R&D point of view with the operator world. What we do get there by incremental revenue as long as it exceeds any -- the incremental marketing costs in terms of what we get back from most retail subs really provides a contribution for us that we think is important. The other thing, which is less directly to the financial element of your question but very importantly in terms of how we look at the retail business, that provides a whole level of DNA, a whole character to our company in terms of constant innovation and all. That breaks us out of the pack from traditional players in the cable vendor world. That cable vendor world has not been known generally as one that innovates well, that really has the kind of DNA for constantly bringing about the kinds of things that allow cable to be at the cutting edge. And the fact that we exist in that world is something that I think is viewed very positively by the industry. So that's kind of a nonfinancial interplay of those 2 pieces of the business.

Operator

Your next question comes from Tony Wible of Janney.

Anthony Wible - Janney Montgomery Scott LLC

I was hoping of you guys can provide us an update on 2 things, one is on Best Buy, where you guys stand in kind of implementing your software in some of their devices. And then also, if we think about Virgin Media and the fact that your default device, do you guys have a time horizon for how long do you think it would take that to be based on their current churn trajectory? And then I have one follow-up.

Thomas Rogers

Well, as to Best Buy, we are developing, as you know, for the Insignia brand TV, an interface for the framing of broadband content directly to the Insignia sets. So that's something that is moving along nicely. I won't give a specific time frame, which Best Buy wants to speak to, but we continue to move forward on that. Very importantly in terms of Best Buy, for a long time, Best Buy, which is a key distributor for us, has been as concerned as we are about how we coordinate the retail business and the need for a CableCARD with what an operator retail incentives are. And when you look at the Comcast type deal, that's the kind of way that you really align TiVo and Best Buy interest with the interest of an operator to make sure that the retail availability of our product can be driven in a way that's consistent with their marketing needs and their -- Best Buy's marketing needs and Best Buy's marketing thrust. So I think both we and Best Buy are excited by that development. In terms of Virgin, what was your question there?

Anthony Wible - Janney Montgomery Scott LLC

Basically, given your status of being kind of the exclusive solution, it would just be a matter of time, I guess, before you are on all of their boxes. I'm just curious if you guys have kind of an internal target for how long do you think that would happen?

Thomas Rogers

Naveen?

Naveen Chopra

Yes. So Tony, the way that we've thought about that question is we look at their historical platform replacement which is typically I think in the kind of 20% to 25% of their boxes getting replaced each year. So that's I think one data point. It's also worth noting that unlike traditional box replacements that they've been doing over time, Virgin is very aggressively marketing the new service that they're launching with TiVo. And if you're in the U.K., you would have definitely seen some of that starting to take hold. So we think there is the potential for that to move even faster than the historical precedent.

Anthony Wible - Janney Montgomery Scott LLC

And then the follow-up question I had is just on the tech revenues. I guess if I look at just the revenues and the costs, it looks like it ran negative in the quarter. Can you provide a little color about what drove that? I assume it's one time-ish?

Anna Brunelle

We don't actually give a lot of specific detail out about each technology project that we're working on. That being said, there are milestones related to when we can recognize revenue. And you might notice that this quarter, Q1, we actually beat our guidance and that was because we completed the Virgin milestone a little bit early. But based on that, you'll see a little bit of lumpiness there. I think we also gave some guidance on Q2 about seeing slightly lower tech revenues in Q1 in my prepared remarks. And I think you just have to assume that the pendulum will swing back the other way given a little time.

Anthony Wible - Janney Montgomery Scott LLC

The cost for the first time was kind of greater than the revenue. I guess I'm just trying to figure out is that just a timing issue?

Anna Brunelle

Yes, that's just a timing issue.

Anthony Wible - Janney Montgomery Scott LLC

Okay, great.

Operator

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

David Miller - Caris & Company

A couple of questions. So now that you guys are in this financial position which you obviously announced earlier in the month with regard to the settlement, what are you going to do about the $200 million convert? Are you just going to kind of keep it around just because the coupon is pretty attractive at this point? Or do you just see forcing conversion on the piece of paper and then just going back to being a debt-free company? That's the first question. And then the second question involve the AT&T and Verizon litigation. Our understanding, just in doing some checks on this, is that these guys are going to kind of piggyback Motorola's patent portfolio, and I'm wondering if you have any comment on that. Our understanding is that the patent portfolio vis-à-vis Motorola is quite extensive, very extensive in fact and even more extensive than yours, which is obviously pretty extensive as you alluded to. So I'm wondering if your General Counsel might comment on that.

Thomas Rogers

Okay. As to the convert, the terms of the convert does not really lend itself to retiring that near term. So the convert will remain out there. However, as I said in my remarks, we're obviously going to think hard about how we can maximize shareholder value in terms of the use of cash. One of the things obviously that we have to seriously consider is the possibility of a share buyback. And I think that gets serious consideration in light of convert as a way to deal with the potential dilution issues that, that caused. So that's all front and center for us and something that we will be working our way through. As to the AT&T and Verizon question, I'll let Matt Zinn, our General Counsel, answer that. I just want to, as a general matter, say that there's been a lot thrown at us in response to our law suits against AT&T and Verizon. Microsoft has obviously aggressively stepped in to try to defend the interest of AT&T. Motorola more recently stepping in to defend the interests of Verizon. We've been extremely successful over the last several weeks in getting the actions that those various players have filed against us, stayed, getting their certain patents to be dropped in terms of litigation, others thrown into review at the PTO which has really allowed us to get into very clear focus, what's the main action here, which is the Eastern District of Texas, our aggressive pursuit to those cases. And In fact, they're moving along at a good pace with claim construction, the critical initial phase of the litigation scheduled to come about in early June. As to the patent portfolio in particular, Matt, do you want to answer that?

Matthew Zinn

I don't have a whole lot more to add than what Tom said. I mean listen, all patents are not created equal. You don't just put them on a scale and say, "Oh, I have more patents than you do. Therefore, I win." If it was that easy, we could all save a lot of money in litigation costs. We feel comfortable about our position in litigation. Microsoft, Motorola, AT&T, Verizon, they sell a couple of more boxes than we do. So it's not an even risk profile here, and I don't think there's much more we can say other than that.

Derrick Nueman

David, this is Derrick. The other comment I would make is that our 389 patent has gone through 2 re-exams. And DISH took every piece of prior they could think of and put it in front of the USPTO, and our patents came out. So I think that says a lot for where we think we sit.

Operator

The next question comes from Alan Gould of Evercore Partners.

Alan Gould - Evercore Partners Inc.

I have a few questions if I might. First for Anna, the easy one. The $46 million to $48 million of revenue guidance for 2Q, does that include the $11 million of DISH revenue recognition?

Anna Brunelle

Yes, it does. And as I said in my prepared remarks, that's slightly offset by what we expect to be our lower technology revenues in Q2.

Alan Gould - Evercore Partners Inc.

Okay. Second, Tom, more of a theoretical question. This gets back on an earlier one. How can we think of -- I know you're not going to give us each deal for confidentiality reasons, but can we think of how many -- what number of subs you need to reach breakeven? And again, I recognize each deal is a little bit different.

Thomas Rogers

Well, Alan, as you know, we don't give a specific subscriber guidance in terms of profitability or related metrics on a forward-looking basis. I will say that the more recent deals we've done, where we are the exclusive or primary provider going forward gives us a reach under those deals of about 10 million subscribers in terms of total footprint there. And by virtue of the revenues that will be driven off of those deals along with the licensing revenues that we are going to get from our patent front, we see that the trajectory toward profitability as those deals mature gets quite attractive. Looking at the issue of precisely what deals, what combination of subs, what combination of fees from what deals and subs contribute to profitability on their own is really not something that I can speak to. But I will say that the trend of that we're seeing this quarter, which is a much better one in terms of overall MSO subs, is one that we think will continue.

Alan Gould - Evercore Partners Inc.

And my last question is I believe you changed the retail pricing strategy, the $19.99 per month. Can you just give some -- what part of the process was to change the pricing? Because it does become a bit expensive when you include the CableCARD and the hardware costs, I mean, I realize it's a premium service. But are you assuming a higher churn rate or a lower growth in the standalone based on the higher pricing?

Thomas Rogers

Well, as we said in the opening remarks, we spent a lot less on marketing going forward as we assess various price points. The $19.99 really is quite similar to what an awful lot of operators charge when you put together the combination of their hardware fee for the DVR box plus their service costs for the DVR service. So it really is quite competitive. The fact that we now have a lower upfront box cost of $99 provides a way to say, "Look, for about what you're paying, the same you'd pay for your cable monthly bill. By laying out $99 up front, you get a vastly improved array of features. A vastly improved amount of content." And we think that it lends itself to a direct comparison with generic DVRs, which is increasingly, where we're trying to sharpen our marketing message, less on price. We are a premium product. We have very substantial features, superiority relative to generic DVRs. And instead of underpricing them from a service point of view, comparable pricing from a monthly service point of view and really drive the feature distinctiveness. I will say the benefit is that the monthly ARPU of new subs obviously increases substantially the lifetime revenue of a sub, the future value of a sub increases very nicely. And when we look at those features along with the fact that we've reduced the cost of manufacturing of our hardwares, so being able to operate at $99 involves less of a SAC hit. And you saw the SAC improvement this quarter. You put all that together and we're continuing to test these models. But overall, it looks relatively attractive.

Operator

The next question comes from Edward Williams of BMO Capital Markets.

Edward Williams - BMO Capital Markets U.S.

Just a couple of thoughts. First of all, on R&D, can you give us some color as to what your plan -- what your thoughts are with regards to the elevated R&D expense for calendar '11? How sustained is that in out years versus the one-time lift for this year? And as you think about the cash you have on hand now, obviously, you've given thought to buying back stock. But will we see some of that getting invested in the business through such things such as increased R&D efforts?

Thomas Rogers

Well, the R&D has a number of buckets. There is R&D that is related to next-generation product features. There is R&D that is related to the delivery of the user interface and the overall look and feel of the service and the evolution of it. There are the costs related to the implementation of specific cable yields. And then there are the costs that we are incurring now to create a much greater efficiency overall in our code and the implementation of our code so that future deals can be done on a cheaper basis. Our overall goal is how do we reduce the cost per deal in terms of the R&D expense of a specific operator implementation. Obviously, we also got a goal of increasing the revenue per sub of those deals. So as we create more capacity to be able to more quickly and more cheaply implement more operator deals, our goal is the expense per deal going down, not necessarily the total R&D being reduced. Now there will be reductions in some of those other buckets because some of that expense is running hot right now in order to get us to the point that each individual implementation is cheaper. But our goal here is more subs which means more distribution deals, which means the R&D associated with those and how we're really try to measure ourselves to getting the cost of implementation of any one deal down further.

Edward Williams - BMO Capital Markets U.S.

And then if we were to look at the subscriber levels and if you look towards Virgin really kind of getting -- gaining traction as the year progresses and some of the other deals kind of gaining some increased scale, when we really start to see the subscriber numbers, the net numbers actually showing some growth?

Thomas Rogers

Well, we don't project subs going out. I will say that the trends are moving in the right direction. We got RCN, which is an operator, which is really going full throttle in terms of its TiVo distribution; Virgin which is a big operator, which is really being able to beginning to accelerate what it's doing in terms of the efforts that it's just started on in terms of roll out; Suddenlink is beginning to rollout in some markets with more to come; Charter, we look to launch later this year, which is obviously a fairly sizable MSO, and those efforts toward launch will hopefully happen later this year; ONO, which is the largest operator in Spain, we hope to complete development this year with deployment to follow from that. So as that pipeline of activity all matures into -- accelerating rollout and accelerating deployment, we're going to be in a situation where those trends will continue to create a positive situation hopefully as opposed to the one we've been in. Having said that, we had a much improved situation in terms of our MSO subscriber count this quarter with probably the best quarter in terms of MSO churn we've had in a while, which is a function of both smaller legacies, DIRECTV churn and improved contribution from those new. We had an improved situation quarter-over-quarter in terms of the retail situation in terms of churn as well. All of the new stuff that we're doing in terms of both our retail offerings and our broader distribution offerings are continuing to grow, continuing to create an accelerating line of growth. And that will continue to accelerate. The legacy roll off of standard definition, single-tuner TiVos or DIRECTV boxes from several years ago from legacy DIRECTV deals really aren't a measure of the growth of the company. I think everybody knows why those kind of boxes are rolling off. And everything we have going by way of new HD TiVo Premieres, our retail offering, the churn on that is very, very small. The contributions coming from these new deals, as each one hits their stride, will obviously when there are exclusive deals or the primary distribution deals be quite significant. In terms of the specific time on that, stay tuned, but all of those trends are moving the right way.

Operator

The next question comes from Rich Tullo of Albert Fried.

Richard Tullo - Albert Fried & Company, LLC

First question is for Tom, second question will be for the Counsel. Tom, to what extent do you see the Comcast deal as one-off owing to TiVo's long-term relationship with the company? Or is this a template, just one option for a variety of relationships that TiVo can have within MSO? And do you think MSOs will evolve over time to provide the set-top box and value-added services just as mobile providers provide phones and apps? And where does TiVo fit into this industry and evolution?

Thomas Rogers

Well, we have flexibility in terms of how we deal with operators, and we have a number of models. Most operators want to deal with us on the basis that a model that we've, say, done with Charter or a model that we've done with Virgin. In Charter's case is taking our box and using it as a cable provision, cable operator deployed box where our software and hardware are part of the overall operating by-the-cable operator where that box is provided on a lease basis the way that the industry traditionally does. In the case of Virgin, somewhat similar, only we're building our software into somebody else's hardware. And in either case, we're comfortable with what the per month per sub recurring revenue model is all about. And so we're relatively indifferent to either of those approaches. In the plain case of Comcast or for that matter, Cox, where we have done a somewhat different deal which is geared toward taking the operators critical video on demand content and making it a full-service box from that point of view, which they install and which they market but which the consumer actually purchased rather than it being operator provisioned. That was really a function of relationships with operators who we had found were pursuing approaches which were a bit slow for us in terms of understanding how TiVo could rollout on a faster basis. And we came up with this model in working with them which gave us a much faster track to getting to the market much easier in terms of their infrastructure, in terms of their architecture, in terms of the development work that needs to be done and allowed us to get out from under some of the middleware backlog that had been making faster progress on those fronts more difficult. So I think what we've been able to find here is we put ourselves in the position of having won more operator deals in terms of advanced television than anybody else out there is that kind of flexibility has served us well. But I think the kind of deals that you're seeing in the case of Charter, Virgin or the ones that most operators are looking to embrace.

Richard Tullo - Albert Fried & Company, LLC

Okay. And now, the question for Counsel. We, at Albert Fried, we also do due diligence. And we found that Motorola didn't develop those patents internally. However, they bought it from a contract engineering operation which kind of has a linkage in my view to the DISH case because DISH accused TiVo of inequitable conduct. And we are working with a firm called Lexmark at Silicon Valley that has a really expensive patent database that investigates such things. They recently did a report for Apple, which I'm looking at right now shows of the roughly 1,400 patent cases that were brought in 2009, inequitable conduct could have played a role in 3,000 and in roughly, let's call it, 262 cases inequitable conduct was either found directly by the rulings or implied by the later settlements that were concluded. If Motorola pursues this case with TiVo, to what extent does TiVo think Motorola's patents have survived the level of due diligence as TiVo's patents? And can TiVo bring a counterclaim against Motorola for inequitable conduct? I'm not an attorney but this is just something I've been thinking about.

Matthew Zinn

Okay. I don't even know where to begin with those questions. Inequitable conduct is a standard defense that's alleged in any case that you can possibly bring, raise out as a defense. Very rarely does it survive. The practice is subject to an en banc case that was heard the same day as the TiVo versus EchoStar en banc case. I can't, I'm not going to comment on what claims we could bring or what claims could be brought against us. That's highly speculative. It is true that certain Motorola patents were acquired. I don't know if it was from a contractor or it was from another company that Motorola acquired. There might have been multiple change of title there. But none of that is really relevant to the fact that -- the focus here is whether AT&T and Verizon infringed TiVo's patents. That's the focus. People are going to throw all kinds of stuff back at us. People are going to say our patents are invalid. They've been saying that for years and our patents have survived challenge after challenge after challenge. And that's just standard operating practice in patent litigation these days. There are a lot of allegations. There a lot of counterclaims. All it gets sorted through, inequitable conduct is just one of those things. And I'll just leave you with that.

Richard Tullo - Albert Fried & Company, LLC

Fair enough.

Thomas Rogers

I might just add that one of the Motorola patents was unsuccessfully used by DISH to try to invalidate our Time Warp patent in a recent reexamination. So just to make sure we underscore Matt's earlier point, not all patents are created equal.

Richard Tullo - Albert Fried & Company, LLC

And that was my point.

Operator

At this time, there are no further questions. I will now turn the conference back over to Mr. Tom Rogers for any closing remarks.

Thomas Rogers

Thank you. Well, this was obviously a historic quarter for TiVo in terms of the settlement and it being our most profitable quarter in the company's history. But I think we really firmly answered the 2 main questions relative to our model. Is there value to our IP? Yes, it's been clearly established. We have substantially improved the financial character of the company as a result. The other cases are moving forward. Missiles launched at us, we have successfully been thwarting so we can keep the focus where it should be on our pursuit of the infringement of our intellectual property and we plan to aggressively do that. On the second front, which is the cable operators need for advanced television solutions, look, all cable operators here and around the world for the most part are going to need to move to some advanced TV solution. That makes the opportunity huge. Right now, the way we see it, there are only 2 players that are really mixing it up on that front. Only one, us, has deployed in terms of their advanced TV solution with anybody. That leaves a terrific playing field for us to be able to grow our distribution base and drive the subtrend improvements and drive the profitability improvements that flow from that. We've shown we got a growing list of operators that are signing up of all sizes. We have a growing list of deployments that are continuing in different phases. But as they accelerate, they really do make the kind of contributions that make a difference in driving this model. And with both of those key elements of our business model, I think having been significantly answered over this last quarter, it really was a very important quarter for us. More to come. Thanks everybody for joining us, talk to you soon.

Operator

Thank you. This concludes today's conference. You may now disconnect.

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