TiVo F4Q07 (Qtr End 1/31/07) Earnings Call Transcript

Mar. 7.07 | About: TiVo Inc. (TIVO)

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F4Q07 Earnings Call

March 7, 2007 5:00 pm ET


Derrick Nueman - Head of IR

Tom Rogers - CEO

Steve Sordello - CFO


Daniel Ernst - Hudson Square Research

Tony Wibel - Citigroup

Lee Westerfield - BMO Capital

Mike Kelman - Susquehanna Financial Group

Alan Bezoza - Oppenheimer

Rob Sanderson - American Technology Research

Richard Baldry - First Albany Capital

Bart Crockett - J.P. Morgan

Alan Gould - Natexis Bleichroeder

David Miller - Sanders Morris Harris

Tuna Amobi - Standards & Poor's Equity

Brian Coyne - Friedman, Billings Ramsey


Good day and welcome to the TiVo Fourth Quarter Fiscal Year 2007 Earnings Call. Today’s call is being recorded. The speakers for today’s conference are going to be Mr. Tom Rogers, Mr. Steve Sordello, and Mr. Derrick Nueman. At this time, I would like to turn the conference over to Mr. Derrick Nueman.

Derrick Nueman

Thank you, and good afternoon. I am Derrick Nueman, TiVo's Head of Investor Relations. With me today are Tom Rogers, CEO and Steve Sordello, CFO. We are here today to discuss TiVo's financial results for the period ending January 31, 2007, which is the fourth quarter of fiscal year 2007.

About half an hour ago, we distributed a press release detailing our financial results. We have also released a financial and key metric summary, which is posted on our Investor Relations website. Additionally, within a few hours, we will release a recording of this call that you can access through our Investor Relations section of our website.

The prepared remarks today will last approximately 30 minutes and will be followed by a question-and-answer session.

Before we begin, I would like to note that our discussions today will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that relates to TiVo's future financial results, partnerships, products, and other factors that may affect our future earnings or financial results.

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 the forward-looking statements.

We described these risks in TiVo's recent SEC filings, including our annual report on Form 10-K, our quarterly reports on Form 10-Q, and current report on Form 8-K.

I would also like to note that any forward-looking statements made on the call reflect analysis as of today, and that we have no plans or obligations to update them.

Additionally, some of the metrics and financial information provided in today's call include non-GAAP measures. Please see our fiscal year 2007 key metric trend sheet for a reconciliation of these items.

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

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Tom Rogers

Thanks very much. Good afternoon. Today, I will discuss several topics.

I will first take you through a discussion of our financial highlights. I will then discuss our efforts on the sales and marketing front. Next, I will provide you with a review of the many announcements we have made in the past week and during the fourth quarter. Finally, I will outline our views on five key engines that we believe will drive TiVo's growth going forward.

Before I get into the details of the quarter though, let me first give you a quick snapshot of the progress we made over the course of the year.

The many partnerships and feature developments we have announced make a very compelling case for how we have solidified our standing as the leader in shaping the future of the media and consumer electronics landscape.

We made significant progress on our mass distribution strategy with the deals we entered into in fiscal 2007 with Cox, DIRECTV, Cablevisión Mexico, BellSouth, and just yesterday EarthLink. In addition to this, we have made enormous progress with the development work related to the relatively near-term launch of the Comcast product.

In content distribution, we can point to our very significant recent announcement with Amazon for having validated the content platform in many other respects through deals with: a leading broadcast network, CBS; a leading major sports league, the NBA; leading packagers of music content with Music Choice and Rhapsody; and leading news organization such as the New York Times, Reuters, and CNET.

We are very pleased that almost all the major motion picture studios are now embracing TiVo as a content distribution platform. And today, we added Sony Pictures to the mix through our Amazon relationship.

We made substantial progress weaving TiVo into the fabric of the advertising industry, signing meaningful agreements with the world's largest advertising holding companies, including Interpublic Group, WPP, and Omnicom Media.

We also signed deals with leading television advertisers, including auto manufacturers such as General Motors, BMW and Lexus. As well as key entertainment players such as AOL, FOX, Warner Brothers and Sony Pictures.

In addition, we signed deals with a wide variety of consumer brands, such as Burger King, MasterCard, Sprint, Nintendo, HP and others.

We've also found ways to embrace other major media brands, such as Sports Illustrated, Star and Maxim. While at the same time, we're creating opportunities for major talent to pursue their future strategic objectives through TiVo by our agreement with International Creative Management.

TiVo continues to be at the forefront of how people watch and get television, especially our differentiated feature set continues to improve and expand.

Through our relationship with Amazon Unbox, our TiVoCast service and our ability to convert Web-based video into TV display content, we've made it clear that TiVo is the leader in providing broadband content directly to the television set.

Additionally to the features that we've announced over the course of the year, Home Movies on TV, TiVo Guru guide recommendations, TiVo KidZone, TiVoToGo, Program Placement, scheduling via mobile phones; and not to mention the TiVo Series3 High Definition Digital Media Recorder. It is now more evident than ever that TiVo is the only branded and truly differentiated DVR in the world.

Now let's move to a discussion of the financials for the quarter. In the fourth quarter, we delivered better than guided results for both revenue and adjusted EBITDA.

Our Service and Technology revenue were up 22% year-over-year to $57.4 million, with our advertising business performing well in the quarter. Our adjusted EBITDA came in at a loss of $14.2 million, which was almost $6 million better than last year.

Moving to sub results, we added a 163,000 TiVo-Owned gross subscriptions in the quarter, down 26% compared to a year-ago, which I will address shortly. Adjusting for churn, our overall TiVo-Owned subscriptions increased to 1.7 million, up 16% year-over-year or 101,000 from the prior quarter.

Also as expected, the number of DIRECTV-TiVo subscriptions declined in the quarter. Our total subscription base now stands at 4.44 million, up slightly from last quarter.

On the sales and marketing front, we devoted significant attention in fiscal 2007 for testing several different approaches, designed to measure how we will market and price TiVo.

Our objective has been to increase not only the size of our subscription base, but also the value of each new subscription brought on. We're seeing continued success from our newer subscriptions, which are paying monthly fees well in excess of last year.

In addition, we continue to benefit from the efficiency of online sale with 33% of total sales coming from the online channel.

We also saw approximately 50% of new subs signing on for three-year commitments. The three-year plan seemed to have become quite popular during the fourth quarter. And as you well know, most cell phone companies are not generally getting close to a three-year commitment.

The success of the three-year commitments has also enabled us to take in upfront cash at levels equivalent to what our lifetime subscription program had contributed.

During the fourth quarter, we introduced at retail stores a concept of a free TiVo unit with a higher subscription price, similar to what we had successfully introduced online earlier in the year.

These pricing and related advertising efforts were tailored to reduce inventory of our single tuner product, a product which we will not put much focus on in the future.

As we alluded to in the last earnings call, we've learned that a rebate intended to create "Free Box" at retail, is not as compelling as the online offer. Principally because someone must part with $220 at the cash register, whereas online there is truly no charge for the box at all. This, along with the limited value of a rebate when TiVo is given as a gift, clearly impacted the effectiveness of these subsidies to drive volume.

The other clear learning at retail is that high-definition television sets are the most important new consumer electronics item. Given the price of our HD unit, we were not able to meaningfully participate in that trend. This also clearly contributed to lower sales volume compared to a year ago, when this trend was nowhere near as significant.

As we indicated in our last conference call, we intended to take a hard look at whether the high level of subsidies that free offer at retail involve were justified in terms of subscription growth or whether reducing such extensive hardware subsidies. And moving towards higher levels of advertising would be a more effective use of marketing dollars.

The timing of this decision also happens to coincide with the introduction of many differentiated features. Not the least of which is the introduction of our premium content offering through Amazon.

With the clear ability we now distinguish TiVo from generic alternatives. While seeing the limits of subsidies at the levels tried in the fourth quarter, we believe that it is the perfect time to shift our marketing emphasis towards educating the marketplace and how TiVo is truly different. It's not only the best way to watch television, but also the best way to get television. We believe that this will not only be a better use of marketing dollars, but will also significantly enhance the overall financial position of the company.

So going forward, our goal will be to grow subscription levels on a more efficient basis.

We recently reduced the hardware box subsidy and plan to continue to reduce those subsidies over the course of the year. We've engaged The Kaplan Thaler Group, an advertising firm, which has had great success in enhancing the value of other major brands, to focus on building a broader brand value proposition through advertising unique and distinct elements of TiVo.

This approach enables us to develop an operating budget that moves us significantly closer to adjusted EBITDA breakeven, at gross subscription addition levels similar to those achieved in fiscal year 2007.

Next, I'll give you a quick snapshot of the many announcements we made during the fourth quarter, as well as three key announcements that we made in the past few days.

We announced that Amazon Unbox on TiVo is now available for all TiVo subscribers with a broadband connected TiVo box. Amazon Unbox on TiVo is a feature that provides TiVo subscribers with the ability to rent and purchase movies and TV shows from leading studios and networks including Fox, Paramount, Universal, Warner Brothers, Sony Pictures, and Lionsgate.

We signed a co-marketing deal with EarthLink that will distribute TiVo as part of a package with EarthLink’s broadband Internet product. The EarthLink deal is TiVo's second distribution agreement with a major DSL provider. They renewed our comprehensive advertising agreement within a public group with a higher commitment level and broader advertiser participation.

Additionally, in the fourth quarter, we made significant progress towards the commercial deployment of TiVo service on Comcast, which we demonstrated at this year's Consumer Electronics Show to rave reviews. Engineering trials were successfully completed in January and tech trials started on time in February. Comcast have identified the launch market, which is sizeable, and we are on track to make the product commercially available in that market in the relatively near future.

We signed the follow-on statement of work with Cox and they are very enthusiastic about how the product is coming together. We expect this product to be initially available later this year. In a recent conversation following the signing of the statement of work, Steve Necessary, VP of Video Product Development for Cox, told us Cox is excited to add TiVo to our portfolio of digital services later this year.

Further, we think TiVo will allow Cox to strengthen our video offering by building on the popularity of the TiVo brand and service of both worlds.

We announced a significant international distribution deal with Cablevisión Mexico, Mexico City’s largest cable operator, which we expect will be commercially available in the second quarter.

We announced joint alliances with Music Choice and Rhapsody, which will provide TiVo subscribers access to the leading digital music services and a library of millions of songs and videos on their television sets. This is an extremely high demand content category that allows consumers to turn their TiVo into their on-demand music service.

We answered the demand of an impassioned user base by partnering with Roxio to bring TiVoToGo to the Mac platform.

In terms of our advertising business, we ended the year on a strong note, with revenues growing nicely on a year-over-year basis in the fourth quarter and contributing significantly to the ARPU growth.

The launch of Program Placement, which has been well received by advertisers, and we believe that it will be an important component for our advertising growth this year. Additionally, we continued to build the foundation for a long-term growth, hiring additional sales and operations headcount.

We made progress on our advertising, research and measurement, our ARM business, as we recently launched the TiVo’s Stop¦¦Watch rating service, the industry’s first syndicated second-by-second time-shift program and commercial rating service, and announced that Starcom became the first media agency to purchase this service.

Discussions are underway with numerous others and we are encouraged by the early progress. And with the efforts in both our advertising and ARM businesses, TiVo has clearly become a key ally of the advertising industry in providing an answer in reaching users who otherwise fast-forward through ads. Quite a turnaround from where TiVo was a year ago.

I wanted to touch quickly on our pending litigation with EchoStar, and specifically, where the appeals process stands. Recently, the Federal Circuit set the briefing schedule with EchoStar’s opening brief due on April 18.

This is an important development, bringing us closer to resolution in this case. In terms of the briefing process, we expect all briefing to be completed this summer. We continue to remain confident in our position and we'll be looking to the Federal Circuit to rule as quickly as possible.

Now, before I turn the call over to Steve for a detailed discussion on the financials and guidance, I want to walk through five key engines that did not exist last year, and that we now have in place that we believe will significantly help drive the company's momentum in fiscal 2008.

First, delivering broadband content directly to the television goes from concept to marketplace reality this year through our launch with Amazon and our broadband features like TiVoCast, Home Movies on TiVo and autotranscode. We'll continue to innovate and we have many great initiatives and ideas for this year.

Second, our mass distribution strategy becomes a reality later this year, as the TiVo service on Comcast is scheduled to launch in the relatively near future and Cox is targeted for initial market availability later this year.

Third, we came out of the holiday season with the full attention of our retail partners focused on the important role that TiVo can play in their goal to offer bundles of High-Definition products and services to consumers.

The TiVo Series3 High-Def Digital Media Recorder is the first standalone TiVo product that is HD compatible. And as I said, we received greatest reviews for its functionality. It is also considered by many retailers to be the first successfully launched CableCARD consumer electronics product.

We will be highly focused this year on moving forward with a lower-priced, mass appeal High-Def unit, which will allow us to much better participate in the HD television trend. On top of that, again, I would like to say that, minimizing subsidies will be a key goal for us with this product line as well.

Fourth, for the first time, TiVo plans to meaningfully advertise its products throughout year with a far more extensive effort to educate the market on TiVo's superior brand and its highly differentiated features.

Moreover, key cable operators will become marketing components of TiVo, as they offer to their subscribers the TiVo service, thus helping consumers understand the differences between TiVo and generic alternatives in contrast to current practices, which often creates confusion.

Fifth, we believe our financial model will move us significantly closer to adjusted EBITDA breakeven and substantially improve the perception of the company's long-term financial prospects.

These five engines along with a growing momentum we have in our advertising business and our substantial opportunities in international markets, will continue to demonstrate in the fiscal year 2008 that TiVo has the tools in place that are necessary to grow TiVo's subscription base and solidify our critical role within the media landscape.

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

Steve Sordello

Thanks, Tom, and good afternoon everyone. To begin, let me provide you with our 2007 fiscal year-end and fourth quarter financial results, followed by a look at the metrics and then finally our business outlook.

Before I get to the results for the quarter, let me touch briefly on fiscal 2007. This past year, we took important steps, which we believe will benefit the business going forward. We entered the year with a lot of questions about our future. Our DIRECTV relationship was in question and we extended our agreement with them, to ensure the existing TiVo DIRECTV users continue to have TiVo and that we continue to receive monthly fees.

Our Comcast partnership was in its infancy. Now the product is supposed to launch and we signed an additional partnership with Cox. Our subscription revenues were impacted greatly by lifetime subs, some of which no longer generate subscription revenue. Over the course of the year, we improved the value of each new sub through higher monthly fees and longer commitments.

Our advertising business was nascent and somewhat isolated from the media world. We increased revenues, signed multiple agency deals, launched new and innovative inventory revenue opportunities and created a syndicated breeding service to help advertisers, ad agencies and networks to measure the impact of DVR usage.

And finally, we spent significant resources towards our intellectual property case against EchoStar. And our IP was strengthened with our trial court victory in the Eastern Texas District Court.

This is a backdrop. I'll now quickly touch base on our full year fiscal 2007 results.

Service and Technology revenues were $218 million, advancing 28% compared to the prior year. Service revenues were $198.9 million, up 19% driven by increased subscription in our TiVo-owned sub base, and growth in our advertising business.

Technology revenues were $19.1 million, compared to $3.7 million a year ago. And the increase here reflects the development work primarily related to Comcast. We lost $29.1 million on an adjusted EBITDA basis, compared to $33.2 million a year ago. And our net loss was $47 million, compared to $37 million a year ago, reflecting the impact of stock option expensing.

Now, I would like to comment on our fourth quarter financial results and metrics. Financial results for the quarter were strong with revenue and net income above the high-end of guidance and with operating cash flow of approximately $22 million in the quarter.

Service and Technology revenues were $57.4 million, advancing 22% compared to the year-ago period. These results exceeded our guidance range, as our advertising business executed well in the quarter, growing nicely year-over-year.

Service revenues were $53.5 million, up 16% year-over-year, driven by an increase of 235,000 net subs in our standalone base over the course of the last year. Technology revenues were $3.8 million, compared to approximately 700,000 in the year-ago period. Again the increase here reflects the development work related to Comcast.

Excluding expenses related to stock option, cost of service and technology revenues were $15.5 million for the quarter, which consisted of $12.3 million related to service revenues. The gross margin on our service revenues were 77%.

Our hardware margin, which adjusts for hardware revenue and hardware costs, was a negative $8.5 million. This included an inventory write down of approximately $2 million related to excess component materials that are currently not expected to be used in the next 12 months.

We incurred $14.8 million in expenses related to rebates, revenue share and other expenses associated with our retail channel.

Excluding stock-based compensation, operating expenses as a percentage of service and technology revenues were as follows: (1) Sales and marketing 28%. As we discussed on our last call, this was up compared to the year-ago period, as our holiday advertising was concentrated in the fourth quarter, while last year, it was more evenly spread in the second half of the year. (2) Research and development 20%, and (3) G&A 12%.

G&A expenses were down $4.6 million, compared to the year-ago quarter due to lower costs associated with the EchoStar litigation.

Stock-based compensation expenses were $4 million and interest income for the quarter was $1.4 million leading to a net loss of $18.7 million. Our loss per share was $0.19 for the fourth quarter, compared to a loss per share of $0.25 in the year-ago period. Our fourth quarter EPS was based on $96 million weighted shares outstanding.

Our adjusted EBITDA loss was $14.2 million, which compared favorably to the loss of $19.9 million in the year-ago period and to our guidance of a loss of $28 million to $33 million. This includes the component inventory write-down of $2 million.

In addition to stock-based compensation and interest income, our adjusted EBITDA calculations adjust for $1.9 million of depreciation and amortization in the quarter.

The contributors for the better than expected adjusted EBITDA results include: stronger top line results driven from our advertising sales business and improvements in our monthly service fees from new subscriptions.

Reduced rebate expenses associated with a lower level of retail sales, lower levels of rebate redemption and a reduction in the rebate going forward.

On that note, as of February 15, we have reduced our rebate by $30 on our Dual Tuner product and $50 on our Single Tuner product, which reduced the rebate liability we reserved for units in the channel at quarter-end. And lower than expected litigation costs in the quarter.

I will now touch briefly on the highlights of the balance sheet. We generated about $22 million in operating cash flow in the fourth quarter, ending the year with approximately $129 million in cash, cash equivalents and short-term investments.

As we have previously stated, following the holiday period, we typically see an improvement to our cash position as we collect on the receivables generated during that period. We expect cash levels to be down in the first quarter due to the payments of rebates associated with holiday sales and supplier payments.

Due to lower retail sales, inventories ended the quarter at $30 million, which was higher than we had expected. Given the holiday results and current inventory levels, we believe it was prudent to take an inventory write down for excess component materials that we do not currently expect to use within the next 12 months.

Turning to our key pricing and volume metrics, our TiVo-Owned gross additions were 163,000, representing a 26% decrease compared to the year-ago quarter. As Tom previously discussed, we believe the year-over-year decline was a combination of several factors: The lack of effectiveness of the free offer at retail stores, not having a lower-priced mass market high-definition product, and increased service pricing relative to a year ago.

Churn was 1.2% per month, up from the prior quarter. The increase was due to a higher level of fully amortized churn, which is basically a lifetime sub that have been fully amortized over four years that have not contacted our service within the last six months and an increase in cancellation.

We believe the large surge in sales at HD television sets this holiday season led to the pick-up in cancellation. We feel that we'll be better positioned to take advantage of the HD growth, as we focus on delivering a lower-priced HD unit.

On a net basis, we generated 101,000 net TiVo-Owned additions in the quarter. Our TiVo-Owned sub base now stands at approximately 1.73 million, which is up 235,000 from the year-ago period.

For the fourth quarter, our TiVo-Owned service average revenue per user was a record $8.99. In the quarter, we saw a lift from our advertising business and from new subscriptions, which continue to come in at average contract prices that exceed our current ARPU.

These improvements in ARPU were partially offset by a larger number of lifetime users that have been fully amortized. As we discussed last quarter, these amortized lifetime users do not contribute to revenue, but remain in our sub base, negatively impacting our ARPU calculation.

In the quarter, we had approximately 165,000 cumulative lifetime subs that have reached the end of the 48-month period, TiVo users to recognize lifetime revenue. Compared to the fourth quarter of last year, fully amortized subs were up roughly 65,000.

The average monthly price paid on a new TiVo-Owned sub remained at solid levels, well above last year and roughly equivalent to last quarter's level.

Further, in the quarter, we saw approximately 50% of new gross additions, choosing either the three-year prepaid or the three-year monthly plans, which is important because it represents a higher commitment level from our sub base. While ARPU will be impacted quarterly by the seasonality of the ad sales business, we expect to continue to see ARPU benefit from the higher monthly service pricing plan.

Turning to acquisition costs, our total acquisition costs were $40 million compared to $36.3 million in the prior year. Our second quarter was $245, up about 49% from the year ago quarter. The timing of selling of inventory to the retail channel combined with a lower gross additions and a heavier weighting of holiday advertising spend in the fourth quarter compared to the prior year led to the increase.

As we previously discussed, this is a fully loaded metric, including both variable and fixed cost element, not only including stock option expenses but also expenses related to our ad sales business.

With our DIRECTV sub base, we are seeing the trend we expected as our DIRECTV subs decreased by 91,000 in the quarter. DIRECTV distributed very few TiVo units in the quarter, and going forward, they do not have the right to market and distribute TiVo, but we will expect similar sub trends this past quarter.

The DIRECTV ARPU was $1.02 for the quarter and this ARPU excludes the monthly fees we defer until the end of the relevant maintenance period.

Before I get into the specific first quarter guidance, I would like to discuss some overarching goals for fiscal 2008. First, as we look at the model, one of the fundamental questions that I have been focusing on since I came on board, relates to the subsidization of hardware in our standalone business and whether this is the most effective way to grow long-term value.

As we enter fiscal 2008, we are now in a stronger position to refocus our investment away from hardware subsidies towards a more advertising-centric approach. To that end, we recently reduced our rebate and it is our goal to further reduce rebate as the year progresses and our marketing takes hold.

Second, we plan to continue to invest aggressively in our product to ensure we further set TiVo apart. And finally, we expect a more advertising-centric approach will lead us to get significantly closer to adjusted EBITDA breakeven for full year fiscal 2008.

This goal assumes TiVo-Owned gross adds roughly equivalent to last year and accounts for current expectations related to litigation costs and currently expected R&D levels.

Turning to specific guidance for the first quarter. We expect service and technology revenues of $57 million to $58 million, of this we expect technology revenues to be roughly in line with fourth quarter levels. We currently expect an adjusted EBITDA profit of $1 million to $5 million, and a net loss of $4 million to breakeven net income.

From a business model perspective, we have three elements that are important drivers in fiscal 2008.

First, the shift towards a more marketing-centric approach around our product value proposition, if successful, should allow us to grow subs more efficiently and thereby lead to more leverage in our financial model.

Second, with the commercial launch of Comcast and Cox this year, mass subscriber growth should be less cash-intensive and further leverage should be gained as the cable industry moves from trying to blur the distinction between TiVo and generic DVRs to being active proponents in marketing and distributing TiVo's premium offering.

And finally, over the course of the year, as our investment and mass distribution efforts come to fruition, our advertising business should begin to benefit and become a more significant growth driver for the company.

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

Question-and-Answer Session


Thank you. (Operator Instructions). Our first question today is from Daniel Ernst from Hudson Square Research.

Daniel Ernst - Hudson Square Research

Good evening. Thanks for taking the call. For my one question, you indicated that your first market with Comcast would be rolling out in the very near future. Can you give us a sense of how many markets Comcast plans to roll out over the course of fiscal '08? Thank you.

Tom Rogers

Hi, this is Tom. Comcast has made clear that they'll start with an initial market, which is a large market they have identified. It's a sizeable market and they'll continue to roll in additional markets from there.

As I said, the engineering trials were successfully completed in January and the tech trials started on time in February, and if things continue to run as we expect them to, there is every expectation that Comcast will be able to launch in that initial sizeable market some time this spring. Beyond that, we aren’t able to announce what Comcast's roll plans are, but over the course of the year the expectation is that much of the Comcast base will have TiVo available to it.


And we will go next to Tony Wibel from Citigroup.

Tony Wibel - Citigroup

Good evening. I was hoping to start with actually a follow-on on the Comcast question. What exactly from Comcast is in the guidance that you provided?

Tom Rogers

What from Comcast is in the guidance provided? We only provided guidance with respect to the first quarter. And in terms of our first quarter, as I said, since we are looking toward sometime in the spring, which obviously goes as far as June. And we are only looking at an initial market to launch. There wouldn't be any revenue of any material nature at all of Comcast in the first quarter numbers.


And we will take a question from Lee Westerfield from BMO Capital.

Lee Westerfield - BMO Capital

Hi, thank you very much. Actually may be two quick ones. First, if you can elaborate on the advertising budget for this year? And then secondly, both of you, Steven and Thomas, in the past you've talked about different buckets of the consumer markets moving to analog, cable, digital and then high-end early adopters for the Series3. Does the shift here in marketing emphasis suggest that you are moving towards the upper tier, two-tiers there, the digital cable and high-end consumer, predominantly now? Or will there be a shift in your market strategy?

Tom Rogers

Thanks Lee. As to the first question on advertising budget, I take it as our advertising marketing expenditures. With respect to those, I think without putting specific numbers against it what we've clearly concluded based on an active year last year of testing various subsidy programs and various approaches to discounting a TiVo unit. That with clear success online and less ability to move the dial as you move a full subsidy unit in retail we decided that it would be much more efficient to begin to advertise more and subsidize less, which was the question we posed in our last quarter call.

And with that we will begin, once our advertising campaign is in place, which will not very much affect the first quarter. But once it's in place, we will be looking to advertise on a continuous basis, as opposed to our past practice which has been to advertise for a short period around the holiday season as opposed to ongoing continuous advertising.

And we think it's the right time, not only having come to office we have of the many learning's of the last year, including the fourth quarter with respect to the values of subsidy and how far that moved the dial.

But as we've also pointed to, it's the right time given all the feature set development we've done, capping with the Amazon content offering. That we believe we really do now have a full set of highly distinguishable features, which will lend themselves to a much more extensive advertising campaign.

Having said that one of the key ways that we are going to get to a much closer to the EBITDA breakeven result over the course of this year is to be reducing our overall marketing expense, because the downturn in subsidy expense versus the upturn in advertising expense overall will save the company money. At the kind of subscription level that we achieved in the last year which is what we've pointed to in terms of being able to get the company overall to a much closer to EBITDA breakeven level. So, I know that's not putting a specific number against it, but I hope directionally that gives you a sense.

Derrick Nueman

Next question.


And it will be from Mike Kelman from Susquehanna Financial Group.

Mike Kelman - Susquehanna Financial Group

With regards to your expectations for approaching EBITDA breakeven next year, can you talk about what your current expectations are for litigation costs and R&D spending? Should we use the fourth quarter as a good run-rate for both the SG&A and R&D lines?

Tom Rogers

I think it's fair to say that there would be some increases in R&D over the course of the year. But we are geared toward being able to maintain our overall levels of expenditure in a way that would not be very significant. Steve, you want to add anything to that?

Steve Sordello

Yeah. I'd just elaborate that. It is a part of our budget this year. It did put increases in to continue to develop the products and invest in the product. So it's a moderate growth, so I would not take the Q4 run-rate if there is growth in our R&D spend planned in the budget.

And on the litigation side, I don't think we want to comment, in terms of what level of litigation we have planned in our budget, or whether we want to keep that flat. But the target that we have out there encompasses some spend on that side as well.


And we will take question from Alan Bezoza from Oppenheimer.

Alan Bezoza - Oppenheimer

Well Tom, you spent a good deal of time talking about the momentum you have and also the differentiations that TiVo has versus the generic DVRs out there. But when you look at the numbers and the subscriber growth you have, weaker subscriber growth, higher churn, and you are guiding for lower net adds this year versus last year, assuming you have flat gross adds for the full year. So, I just wanted to get a sense of your disconnect there in what we're seeing on the sub side versus what you are saying on the momentum?

And then on the Amazon deal -- I hate to ask two quick questions, but the Amazon side, what is the opportunity for Amazon this year, is it a big driver of subscribers? Or is it on the advertising? Or where do you see the financial revenue driver for the Amazon deal? Thanks.

Tom Rogers

Well, the Amazon deal is certainly one of the features that we will look to promote as we begin to position TiVo not only as a great way to watch television, but increasingly terrific way get new television and all the access that that gives you. And we will use that as a way to promote new subscribers and drive revenues that way overtime. Particularly, as the capability at some point later in the year to broader programming on screen on the television screen itself develops. And we think that more direct revenue contribution, in terms of the incremental revenue from program distribution itself begins to develop.

In terms of the overall momentum of the company, I think you first have to point to the fact that we have a major engine that we’ll be developing this year, which is the beginning of the Comcast rollout later in the year, Cox rollout and the ability to drive incremental subs without the accompanying subscriber acquisition cost, which will certainly drive momentum forward.

Two, the momentum that we are seeing within the advertising community in terms of just broader acceptance of our product, the strategic issue that we address for advertisers, the accountability and measurement that we provide in terms of our audience research, there is a very much broader acceptance there.

When you want to look at the standalone business itself, we are looking to make our marketing expenditure more efficient by reducing subsidies and increasing advertising.

What we are pointing to in terms of overall financial profile of the company being much closer to EBITDA breakeven as something around this year’s levels of subs, does not mean that we are totally capping the expectations of our advertising at this year’s level of subs.

It maybe that our effectiveness at translating the many differentiated attributes of TiVo is effective, and if so, those gross sub numbers could increase, in fact we're specifically not giving any gross or net subscriber guidance in that respect, but simply pointing to the fact that at current levels of subscribers that we were able to obtain this year, we will be at a much closer EBITDA breakeven financial levels. Steve, anything you want to add to that?

Steve Sordello

I think the only thing to add is one of our focuses that we are going to continue to exploit on the standalone side is to grow the quality of our subscriber base. We talked about our ARPU coming in at a record this quarter, $8.99.

We’re adding subscribers at substantially higher ARPU levels than we have in previous years, and there are some offsets, as some of our lifetime subs are falling off, and they’re offsetting some of the benefit we are getting from a cash perspective and from a momentum perspective.

I think that’s an important element. So we are trying to migrate the investment spend towards more of a value proposition, and also in doing so, lock-in a higher quality level of subscriber.


And we will go next to Rob Sanderson from American Technology Research.

Steve Sordello

Why don’t we go to the next question?


Okay. Once again, it is Rob Sanderson.

Rob Sanderson - American Technology Research

Hi, can you hear me now?

Steve Sordello


Rob Sanderson - American Technology Research

Sorry. Most of my questions have been answered, but just one on legal expenses during the quarter. Can you give us some sense of color there? It seems to be a relatively quiet quarter versus some of the periods last year. Can you give us sort of a range of what was spent during the quarter on legal expenses?

Steve Sordello

We don’t want to give a specific amount, but it was slightly capable to what we thought going into the quarter. We are in this quiet period in the litigation side of things, but we don’t want to give a specific number there.


And we will take a question from Richard Baldry from First Albany Capital.

Richard Baldry - First Albany Capital

Thanks. Could you about to what degree Amazon might have flexibility to move out of a price per model into a subscription model? Whether you thought that over time that would drive some ability to offload some of your subscriber acquisition costs to a third party that might help you bolster your growth rates? Thanks.

Tom Rogers

Well, the whole area of broadband distribution of content is very, very new. It’s pioneered by us when it comes to broadband distribution directly to the TV. So I am sure there will be many developments in terms of marketing and access and comfort of movie studios with different pricing models over time.

We don't have any plans or discussions with Amazon other than the ones that we put forward here, which we think provides some very attractive pricing at the $1.99 level on both television shows and movie rentals. We will assess that. We will assess how valuable a driver it is in terms of driving for TiVo subscriptions and that may give us some learning relative to your question, but no discussions or plans on that front now.


And we will take a question from Bart Crockett from J.P. Morgan.

Bart Crockett - J.P. Morgan

Okay, great. Thank you very much. As we are coming closer on to the Comcast and Cox rollouts, I was wondering if you could just update us and give us a little bit more detail on what we should be thinking in terms of the cannibalization risk, as subscribers sign up for TiVo on Comcast?

How many of those new Comcast subs would be people who are currently standalone versus totally new to TiVo? How much cannibalization? How much incremental? If you have any data that you can point to that can quantify that or any color you can give us maybe in terms of the standalone subs you have in Comcast territories and Cox territories, so we can take a look at the exposure there? Thank you.

Tom Rogers

I don’t want to speak for Comcast or Comcast’s sense of where their subs will be coming from. I will say that, it’s not an issue that we can ignore. On the other hand, the standalone features of TiVo are, there will be many that will not be at least initially available through the Comcast offering.

The Comcast offering will be a superior offering to the current DIRECTV offering, but many of the features that we've put out, developed in last year, used to differentiate TiVo from generic DVRs, not the least of which is the Amazon content offering, is not going to be available through Comcast.

So, both those existing subscribers that value those features, of which there are many when you look across the entire feature set, and new subscribers where much of our marketing will relate to those new features, I would suspect that, that issue at least at the outset will not be all that significant. We will certainly have a better sense of that once it begins to roll.

Comcast, of course, is beginning to focus on win backs from the satellite world, and with that, obviously standalone issues are far less implicated. But it may develop as more of an issue over time, as the rollout gets more significant from Comcast in more markets, the ability to offer more of the TiVo features over time increases.


And we will go next to Alan Gould from Natexis Bleichroeder.

Alan Gould - Natexis Bleichroeder

Thank you. While a few times you've mentioned the ad revenue as building nice. I know it's coming off a very small base. Can you give us a little more color on what's happening on your advertising revenue business?

Tom Rogers

Well, I think it's fair to say that the fourth quarter is a seasonally strong quarter for advertising. So there was certainly a lift there. But we hired more salespeople. We began to create a greater regional focus, in terms of how our salespeople divide territories and with somewhat greater efficiency in the sales process.

I think we've done a better job as of late, distinguishing TiVo from other elements of new media inventory. Where there are many offerings out there in the marketplace on the Internet side, the mobile telephony side, the VOD side, TiVo and DVRs, by maybe just thrown into that same pack.

And I think we've done a better job of saying wait a minute. Yes, there are new forms of new media inventory and you can think of TiVo as one. But what we addressed, which none of those others do, is how do you get somebody to engage with your ad, who may otherwise be fast-forwarding it and not seeing it altogether, when they are sitting in front of their television sets, so your primary means of reaching consumers.

And that strategic differentiation relative to the other alternatives for new media advertising money, I think has begun to gain some traction. We've also introduced in the fourth quarter, new inventory that has looked like it has gained some pretty quick traction.

There is this Program Placement offering, which when at the end of a program, the 'Do you want to Save or Delete' screen comes up, placing the ability for somebody to access an ad there when they've completed a program. The whole idea of being more willing to watch an ad runs through peoples heads, because they are no longer in the middle of a show. That seems to have created some traction and I do believe that other forms of new inventories that are beginning to be explained better and understood better, will hopefully contribute to that.


And we have a question from David Miller from Sanders Morris Harris.

David Miller - Sanders Morris Harris

Hi. Steve. In fiscal '07 you guys added on a gross basis, 429,000 subs. And on a net basis you added 80,000 subs. So that's a conversion rate about 19%, 80 being the numerator, 429 being the denominator. You are guiding to grow sub addition levels similar to those achieved in fiscal '07. Just for modeling purposes, should we assume that the conversion rate should about same?

Steve Sordello

Well, first of all we're not guiding towards any particular sub number on this call. What we're saying is, for purposes of looking at our financial model, what the objective could be, what it could look like. And so, I want to stay away from saying that we're guiding towards a particular number, because we're not doing that. We're extensively trying to actually grow our sub base well beyond that, if the marketing is successful here.


And we will go next Tuna Amobi from Standards & Poor's Equity.

Tuna Amobi - Standards & Poor's Equity

Hello, can you hear me?

Tom Rogers


Tuna Amobi - Standards & Poor's Equity

Hi Tom, I would like to focus for a second on the analog cable market, which I think you have identified in the past, as a potentially significant market for growth. The question is can you give us a color on how much that market was a factor in this past quarter, and any significant marketing strategy that you are specifically targeting for this market? And as you look out over the next two years or so, with cable operators, other digital simulcast and the digital transition set for February 2009. How do you see this development that is impacting your assessment of this market as a potential contributor to TiVo?

Tom Rogers

Thanks for picking up that question, because there was a piece of this question earlier which related to that and I neglected to answer it. The analog market is still roughly half of the total cable market. So there are a lot of basic cable analog subs somewhere in the order of 30 million to 35 million homes. And as we said before for those, that want DVRs, the only real option is getting TiVo at retail, unless they want to go through the expense of upgrading to digital, of which many have resisted. And I think for the time being, there will be a healthy pool of basic analog subs.

What we found in the quarter, which is fairly consistent with what we've seen over the last few quarters, close to 50% of our new subscribers are coming from that analog basic cable base. So it continues to be an opportunity for us.

We saw the limits of subsidy at retail and we did have some sense that the subsidy programs, actually the more extensive subsidy programs, might more extensively pull from the basic analog pool than from others. But as I said, the overall distribution of analog subs remained about the same for the quarter. So we didn't see any particular additional pull coming in from those bigger subsidies.

Our view is that continuing to educate people about TiVo, the significance of the brand, the ease and simplicity that people appreciate from it and some of the additional features will be the important ways to continue to drive subs going forward from that particular sector, as it might be from other sectors.

So we are by no means shifting away from focusing on the opportunity to draw in those subs. I think it will continue to be an important opportunity for us.


And our last question today will be from Brian Coyne from Friedman, Billings.

Brian Coyne - Friedman, Billings Ramsey

Oh boy, last in the line, first in your hearts. Hey, so quick question, I think in your bullet points regarding growth drivers for the coming year. You mentioned a little bit about a lower-price mass-appeal HD product. I am not sure I heard too much on the conference call, specifically around that. But if you could talk, perhaps a little bit more about that, some details and perhaps availability? Thanks.

Tom Rogers

I am sorry, on the last question. I do not have a lot to offer. All I can say is the HD trend was very, very significant in the fourth quarter, probably the most significant trend in consumer electronics towards during the holidays. It certainly was one that defined an awful lot of purchases. We had a very high price unit there and so our HD product performed at expectations, which were modest given its price, but we did not have a way to more broadly participate in that trend, which is going to be, I think, the most defining trend in consumer electronics for the next couple of years, and beyond, as the whole government-mandated digital transformation continues to pick up steam.

With that, we are obviously focused on how we could more broadly participate by having a unit that would be lower-priced. And by saying that, I am not trying to suggest that we would engage in massive subsidies around a High-Definition unit to take our current unit and bring it down to a more massive yield price point.

So, we are focused on this issue. It's one that, at some point later in the year, we hope to have a better ability to talk to, but right now I really don't have much to be able to tell you on this other than it will pick up steam as a focus for us, as the year proceeds.


And that concludes our question-and-answer session. I would like to turn the call back over to our speakers for any additional or closing remarks.

Tom Rogers

We feel good about having beaten consensus and beaten guidance and beaten the last year in terms of the overall profitability of the company. I think that this is an indication of growing momentum in terms of our overall financial profile, and we will try to put forward what we clearly believe will be a much more attractive financial profile over the course of this year.

And with that and the advertising that we will be engaging and the new features that we have introduced and the other mass distribution opportunities we have as Comcast, and later in the year, Cox rolls. We really look forward to this year as being one where we can build the value of TiVo.

Thank you for joining us and stay tuned.


That does conclude today’s conference call. We appreciate your participation. You may now disconnect.

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