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TiVo (NASDAQ:TIVO)

Q2 2012 Earnings Call

August 24, 2011 5:00 pm ET

Executives

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

Thomas Rogers - Chief Executive Officer, President and Director

Derrick Nueman -

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

Analysts

Anthony Wible - Janney Montgomery Scott LLC

Mark Argento - Craig-Hallum Capital Group LLC

Alan Gould - Evercore Partners Inc.

Barton Crockett - Lazard Capital Markets LLC

David Miller - Caris & Company

Michael Cohen - Sinova Capital

Richard Tullo - Albert Fried & Company, LLC

Daniel Ernst - Soleil-Hudson Square Research

Operator

Good afternoon. My name is Misty, and I will be your conference operator today. At this time, I would like to welcome everyone to the second quarter fiscal year 2012 earnings call. [Operator Instructions] Mr. Derrick Nueman, Head of Investor Relations, you may begin your conference.

Derrick Nueman

Thank you, and good afternoon, everyone. I'm Derrick Nueman, TiVo's Head of Investor Relations. Welcome to the Second Quarter Ending July 31, 2011, Investor Earnings Call. With me today are Tom Rogers, President and CEO; Anna Brunelle, CFO; Naveen Chopra, our SVP of Business Development and Corporate Strategy; and Matt Zinn, our General Counsel.

We have just distributed a press release and 8-K detailing our earnings, as well as quoting its financial and key metric summary on our Investor Relations website. Additionally, a recording of this call will be available on our website for several weeks. The prepared remarks today will last about 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, subscription growth, research and development and litigation expenses, distribution of TiVo's service with domestic and international operators, future results of our ongoing litigation, value of TiVo's intellectual property and future TiVo products and services. You can identify these statements by the use of words like 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. Factors that may cause actual results to differ materially are described in Risk Factors in our annual, quarterly and current reports with the SEC. Any forward-looking statements made on this call reflect analysis as of today, and we have no plans or duty to update them.

Additionally, some of our metrics and financial information provided on today's call do include non-GAAP measures. Please see our second quarter fiscal year 2012 key metric trend sheet for reconciliation.

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

Thomas Rogers

Thanks, Derrick. Good afternoon, everyone. This was a milestone quarter for TiVo. First, we delivered better-than-anticipated revenue, adjusted EBITDA and net income exceeding our guidance. Second, we returned a subscriber gains in our service provider business, driven by the deals we have put in place over the past 2 years that are now delivering a substantial number of subscribers. Third, we continue to increase our distribution, most recently with Grande Communications, which leverages the development work we've done for other operators.

Perhaps even more important, this quarter demonstrates TiVo's critical role in the rapidly evolving television industry. As we've been discussing for quite a while now, operators need to embrace an advanced television solution that includes: first, seamless access to all 3 forms of content available to subscribers, traditional linear channels, operator video-on-demand and broadband delivered video; second, they need a simple user experience across all that content that provide easy integrated search and discovery; and third, they need a complete family of products beyond the DVR, in order to provide a whole home solution, along with the ability to provide the user experience through multiple devices such as iPad and iPhones and other consumer electronics.

This is a difficult and expensive proposition for virtually every operator, and one that is very challenging for an operator to solve on its own. We help solve these challenges and have a solution that operators can benefit from today, not tomorrow. TiVo represents the only branded user interface, something many operators find extremely valuable, provides the entirety of the viewing experience through which the consumer enjoys television, leverages technology innovation from a successful retail offering and most recently – I’m sorry, most importantly, is the only advanced television solution that has been deployed by operators today.

In just a short period of time, we have repositioned our company to be a full provider of hardware and software solutions, meeting the needs of the operator, in a way that other companies in this space have just been unable to achieve.

On that note, several of our recent deals are now reaching the deployment phase, which in addition to creating subscription growth for TiVo, provide concrete examples for other operators who are seeking solutions for next-generation video platforms that address concerns about cord cutting and cord trimming.

With that, let's get into some of the details from our successful cable activities, starting with our efforts in the U.K., where our work with Virgin Media is a perfect example of how we are executing with operators. Virgin Media's TiVo offering is now in full swing, with extremely promising early results, including approximately 50,000 TiVo subscribers live at the end of July. This is a very strong indication of consumer demand, and what are only in the early stages of this deployment, and we are seeing this demand only accelerate in the third quarter.

Neil Berkett, Virgin Media's CEO, summed it up best during the company's recent earnings calls stating, "I think TiVo will do to our video business what DOCSIS 3.0 did to our broadband business. I think it will significantly change our brand, our perception and our ongoing delivery." He went on to add and I'm quoting again, "TiVo is the best connected TV certainly in the U.K., and I would argue, in the world. It is produced by connected TV experts. It's all they do. That's why we partnered with them. That's why it's actually launched on time."

The international market in particular, is a great opportunity for TiVo because there are hundreds of millions of TV subscriber, whose pay TV providers are going to need to transition to advanced television over the next few years, just like Virgin Media is doing. The early success of Virgin Media has been extremely helpful in showcasing our talents, and we're having meaningful dialogue with others looking to follow this same path.

In the domestic market, our relationship with RCN continues to expand, and they are said to be the first operator to offer subscribers a TiVo whole home solution, based on TiVo's expanded product family that includes a non-DVR set-top box and a 4-tuner DVR set-top box. Further, our non-DVR set-top box, in particular, increases our ability to significantly penetrate the subscriber base of operators beyond the DVR, providing us with an even larger opportunity to grow.

We're also making steady progress with Suddenlink, as we've seen them accelerating deployments and increasing the TiVo footprint beyond Texas, most notably in North Carolina, where TiVo for the first time is being deployed with an Arris video-on-demand system.

As for our deal with Charter, we continue to make progress and we look forward to initiating a trial later this year.

Our deal with DIRECTV is moving toward launch with the DIRECTV/TiVo HD DVR now being manufactured, and we expect DIRECTV to publicly share specific launch details in the relatively near future.

As I mentioned earlier, the success we're seeing in our current deployments has led to additional operators taking notice. To that end, we announced earlier today a distribution agreement with Grande Communications, a broadband communications company based in the Southwest U.S. with about 150,000 video subs. Going forward, TiVo will be the exclusive provider of DVRs for Grande, Envision-Grande will offer its subscribers TiVo's multi-room solutions across its operating area. We expect Grande's initial launch to begin in October. It's worth noting that the speed with which we are able to launch with Grande is a great example of how our recent R&D investments enable us to bring on new customers with limited incremental cost to TiVo.

As you can see, each of these deals and the groundwork we've been laying over the last year or so, is now beginning to pay off, especially in terms of the realization of positive service providers' subscriber additions. This is coupled with great feedback from operators who are finding TiVo give better experience for their customers, resulting in lower churn and better video-on-demand usage. In the months ahead, we look to continue on this trajectory, as deals which currently deploy the TiVo experience continue to attract subscribers, and those in the queue go live.

On the retail side of our business, our ability to provide a non-DVR advanced television solution is providing even more opportunities for growth. For example, Best Buy launched Insignia's Connected TVs with a TiVo Designed user experience. This is the first time TiVo experience is available on a television, as its primary user interface. This effort exemplifies the breadth of our platform and represents another device in Best Buy stores that makes the TiVo experience available to consumers.

While we continue to be cautious with our investments in the retail business, we are confident that our retail offerings will benefit from having the TiVo powered Insignia televisions at Best Buy. More importantly, by leveraging the R&D elements of our retail business into our operator business, TiVo is the only vendor that is in a unique position of having an array of operator products that benefit from 10 years of direct interaction with retail subscribers and households. And by being in retail, we continue to believe we are able to control our own destiny, innovate and deliver the best product with a well-recognized brand. That pedigree of innovation is one of the things operators find extremely valuable.

Finally, also on the retail side of business, we are encouraged that the FCC rules on cable cards recently came into effect, meaning TiVo subs will now be able to self-install cable cards in virtually any cable footprint. And more importantly, cable companies can no longer use price to discriminate against retail DVRs. Specifically, this means that operators may not impose any service fee on a customer using a retail device that is not assessed on a customer using an operator-provided device. And operators that offer set-top boxes, included as part of a programming package or promotion must offer a credit to customers that use retail DVRs instead of the operator set-top box. For example, Comcast has changed its pricing policy and is now providing a monthly credit of approximately $2.50 per device for customers using TiVo DVRs, which we think only makes TiVo a more attractive consumer option.

In terms of our intellectual property and in particular, our patent portfolio, since our inception, we have been diligent in our efforts to file patent applications around the inventions we have created. We currently have 210 issued patents and 389 pending applications in our worldwide portfolio of media experience and connectivity intellectual property that extends to DVRs, set-top boxes, smartphones, tablets and other forms of consumer electronics and processes. And much of this intellectual property extends well into the future. We are very pleased to see that patents and intellectual property in general are becoming increasingly more valuable. And we believe as a result of our creativity and engineering focus, we have one of the more significant advanced patent portfolios out there in these fields. We'll continue to evaluate how to get the most out of this portfolio as the patent world continues to evolve.

Also on the intellectual property front, our actions versus AT&T and Verizon are moving forward with trials currently scheduled this quarter. Obviously, these actions impact our adjusted EBITDA in the short term, particularly in quarters where we go to trial. But we believe this near-term expense is far outweighed by the benefits of protecting our innovation as it was in the EchoStar case, where we ultimately received over $600 million in damages and license fees related to our Time Warp patent.

Shifting to our financials. As you're aware, about 10 days ago, our board authorized a $100 million share repurchase program. Both TiVo management and our board concluded at the time, that with our shares trading at unusually depressed levels, which reflected little beyond our cash and NOLs, and $100 million repurchase authorization could be a highly compelling investment, relative to other uses of cash, while also not limiting our ability to consider other strategic opportunities.

We believe the buyback also speaks volumes about where we view TiVo today, including the progress we've made and our confidence in our growth prospects. This quarter showed to our returns of service providers subscription growth that our recent crop of deals can be expected to significantly contribute to our financial growth over the next several years, not to mention with that subscriber growth, compelling upside from our advertising and audience research activities. It also underscores the opportunity presented by the fact that operators around the globe are seeking advanced television solutions to transform their user experience.

When combined with our efforts to improve cost structure, do more efficient and leverageable R&D efforts, and the reduction in litigation expenses expected as current patent suits progress, we expect to see a notable improvement in our adjusted EBITDA in the next fiscal year.

In conclusion, momentum is clearly building around all the elements of our business that will drive future growth. And with that, I'll turn it over to Anna.

Anna Brunelle

Thank you, Tom, and good afternoon, everyone. This was a significant quarter for TiVo with our execution and investment in our business starting to pay dividends. Our Service & Technology revenue grew double digits year-over-year. We exceeded adjusted EBITDA guidance, and we returned to positive service provider net subscriber gains.

Further, we believe our leadership position in advanced television, coupled with our strong cash and NOL position, places us in an enviable position for growth. Now getting into the quarter. Service & Technology revenues were $49.6 million, up 18% year-over-year. We also exceeded the high end of our guidance range due to additional work we did for Virgin Media and a strong quarter for advertising sales.

Our cost of Service & Technology revenue was $12.9 million. Our hardware loss was $1.8 million, down from the previous quarter and included $700,000 of net hardware loss and $1.1 million of costs related to our retail channel.

Operating expenses were $53.2 million. This was down compared to the prior quarter due to a lower-than-anticipated litigation expenses of about $7.3 million and R&D costs which declined by about $1 million, primarily driven by some expected second quarter outsourced spend shifting into the third quarter.

Interest and taxes were roughly $1.2 million, which led to a net loss for the second quarter of $19.6 million. This led to a loss per share of $0.17 using a basic share count of 116 million shares, which was a significant improvement from last quarter when backing out the EchoStar past damages and related interest. Additionally, our adjusted EBITDA was a loss of $9.2 million, beating our guidance of a loss of $14 million to $16 million.

Turning to the balance sheet. We ended the quarter with $628 million of cash and short-term investments, driven by the first payment of $300 million in the EchoStar settlement. Additionally, on the capital allocation front, 2 weeks ago, we announced the authorization of $100 million stock repurchase program. We believe that our business wasn't being appropriately valued beyond cash and our NOL position, and we think the authorization to repurchase made at that time provides the highly compelling investment return and could provide an opportunity for us to reduce dilution caused by our recent convertible debt offering.

Now turning to our second quarter subscription metrics. As Tom noted, early success with our Virgin rollout, along with acceleration in our deployments with RCN and Suddenlink, led to a return of positive gains in our service provider subscription base, which increased by 10,000 subscribers in the second quarter, despite continued legacy DIRECTV churn. This is a significant improvement from last quarter, and we expect this growth to further accelerate as deployments with Charter, DIRECTV and ONO begin later this year, and as we see further acceleration from current deployment.

In our TiVo-owned business, we saw an improvement in our net subscriber trends as our absolute churn decreased significantly, while our gross additions remain basically flat with the first quarter. Further, our ARPU increased to $8.31, which was up 5% from the prior quarter, driven by our new pricing, along with a solid quarter in advertising sales.

Getting into our third quarter guidance. We expect Service & Technology revenues of $49 million to $51 million, adjusted EBITDA to be in the range of negative $17 million to negative $19 million, and our net loss in the range of negative $27 million to negative $29 million.

With that, let me provide you with a few key items that are impacting Q3 adjusted EBITDA guidance as compared to the prior quarter. First, we're expecting a sequential increase in litigation spend as trials with AT&T and Verizon are currently scheduled in the Eastern District of Texas and as we anticipate material costs related to the Microsoft ITC case; second, we are expecting a typically larger hardware loss due to the normal retail selling activity ahead of the holiday season; and third, our expectations for our current fiscal year R&D spend remain consistent. Though due to the large number of foundational deals we are currently working on, we expect to see an increase in Q3 R&D, relative to the prior quarter.

Additionally, with regard to next year, we expect to see a meaningful reduction in litigation spend compared to this year's anticipated spend of roughly $35 million, and we expect to be able to make our R&D efforts more efficient and leverageable, all while seeing the top line benefits of our distribution deals that are now beginning to deploy. To summarize, this was a solid quarter for TiVo. We exceeded our financial goals and took tangible steps towards increasing the TiVo footprint and creating long-term sustainable growth.

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

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of David Miller with Caris & Company.

David Miller - Caris & Company

Just actually one legal question for your legal counsel that might be on. We are actually under the impression that there may -- that there was a possibility there just really wouldn't be a trial with AT&T and Verizon, if the results from the claim construction hearings came back and issued you guys a very broad ruling. So you guys just said in your prepared remarks there's going to be a trial. You've sort of downticked or upticked the expense guidance with regard to in legal expenses. Is it possible that when the results of the claim construction hearings hit the tape and you get what you want, that you'll reverse that guidance?

Matthew Zinn

We have trials currently scheduled for this fall and that's how we plan. Rulings can take place at any time, can change the dynamics but currently, all we know is that the trials are scheduled for the fall and that's how we're planning. Yes, we could change guidance when events happen but we have to forecast based on what's in front of us.

David Miller - Caris & Company

Okay. And we were -- I mean, just based on past proxy, I mean, we were under the impression that results from these claim construction hearings would've been announced by now, if not maybe 2 weeks ago. Nothing's been announced as of yet. Is there any sort of -- I don't know, language or nod, nod, wink, wink or any kind of loose guidance you can give us as to how you're feeling about the timing there?

Matthew Zinn

No, we're not prepared to speculate. We're waiting for ruling. Our ruling could come on the eve of trial, could come before trial. Judges handle these things differently. Sometimes, they handle them differently in their own courtroom.

Thomas Rogers

One thing to note on the patent front that has been a bit under the radar is the success we have had in stating the various actions by the parties against us in federal court. The federal court action by AT&T, the federal court action by Microsoft, the federal court action by Motorola have all been stayed and what's going forward is our case in the Eastern District of Texas where we are awaiting the claim construction ruling. But the fact that we are able to focus on our affirmative case while their case against us are stayed is a very important context to put all this in.

Matthew Zinn

Right. And our expectations for legal expense for the year haven't changed. Timing can shift as events occur but we still have the same expectations.

Operator

Your next question comes from the line of Barton Crockett with Lazard Capital.

Barton Crockett - Lazard Capital Markets LLC

I was intrigued by your comment about reviewing options for getting full value out of your patent portfolio. I was wondering if it's possible to elaborate and, in particular, are you guys contemplating scenarios where you might sell the portfolio to get value today? And what would entail in kind of a review of how to get value, I mean to date, we've really just seen you deploy products and sue people on the 389 patent and a couple of other patents with AT&T and Verizon but what else could you do?

Thomas Rogers

Well, I won't comment on any specific path but we are considering a number of options there, given the environment where the recognition that patent portfolios have been getting, it behooves us to look at the various ways where we can increase the perception of our value by a better understanding of our patent value. The advanced television space, we believe, is one that's going to get only growing focus in terms of the patent area. We are certainly going to look at any option that may accelerate the perception of our value. But this settlement is generated, as everyone knows, over $600 million off the back of one patent in our patent family. And there's just no doubt that successful litigation improves the value of a patent portfolio. And so battle-tested patents, we think, improve the value of the patent portfolio more than simply the quantity of patents that might be out there. Obviously, we've seen in the news recently some big companies that tend to have a very sizable number of patents. But the number of those that are truly valuable are probably relatively small, and we are very focused on the quality of our patent portfolio versus the quantity. And with that demonstrated showings of its -- of our success, we think that, that patent value will only grow. So it's an exercise that we are going through, that we will spend some real focus on, but we do think it's an area that we will continue to grow in perceived value.

Barton Crockett - Lazard Capital Markets LLC

Okay. And then shifting gears on the third-party business, it's gratifying to see a deal like Grande, but I think many of us think there's an opportunity to get more deals that are with larger operators. You mentioned that Virgin is helping you showcase. I was wondering if you could elaborate on what -- how they're helping you? I mean, are they demonstrating your product or people going to Virgin's facilities and talking to them? And how would you describe the tenor of conversations right now? And how do you feel about the prospects for signing up more impactful deals than the Grande announcements today?

Thomas Rogers

Well, the point of mentioning the Grande announcement in the context we did was not to showcase its size, because it is a smaller operator, other than to say that both smaller and larger operators alike are focused on this whole advanced television solution. The point of Grande is to show the leverageability of pre-existing R&D work, foundational view work that we've done. And once it's completed, where there is substantial cost and time involved, that R&D work can be leveraged to other operators that might have very similar characteristics. And where we find that, as we did with Grande, we have the ability to move quite quickly with limited expense, the ability for the operator to begin deployment from announcement in what we think will be about 2 months, and that is an element of what we hope to be able to re-create in terms of driving the TiVo footprint. So that's the key point there. Obviously, we're very focused on operators of various sizes, both domestically and internationally. Virgin has had a lot of success deploying. It's probably the best-known cable operator outside of the United States. It's in a key market with key competition, with probably the best-known satellite operator outside the United States, so it's a market with a lot of visibility. And it is -- been quite public about its support, and its success with TiVo. And they are certainly playing a role of hosting people in terms of demonstrations, talking people through their experience, both domestic and international operators find them to be a very sophisticated operation, that are able to give them perspective on the full array of issues that are involved in making a transition to advanced television, and what kind of competitive dynamics it helps deal with, which is obviously one of the key issues for all operators, is they face increasing amounts of over-the-top content and various new feature elements coming from competitors. So we're finding that quite valuable to us. But the fact is that every operator's architecture is somewhat different, different vendors, different combinations. And the fact that each one of these, we're able to demonstrate some different combination that we've been able to work with so -- to then make it easier for a subsequent operator to look at what we've done and think that their experience can be put in place with ease is an added part of what we bring to the table with the foundational deals we've been working on.

Operator

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

Daniel Ernst - Soleil-Hudson Square Research

Three questions, if I might. First, on the partner subscribers, I know it's hard to forecast, there's a lot of moving parts here. But do you think that this, over the next 12 months, that this positive sub number that you had this quarter could be a sustainable trend? I know there's still a number of the legacy box of DTVs still yet to roll off. But as that looks to relaunch, could we start to see the aggregate number stay here in positive territory? Then second question, you've discussed your conservatism on continuing to roll out the retail product, and there's some interesting moving parts there going into things like the Insignia TV set and there's things like the Comcast, giving a credit to subscribers, which is more than the

License fee you get in a lot of cable MSO deals, so that's got to be pretty good. But on the other hand, is there any discussion at TiVo about trying to get that to be a neutral business where we're not losing money on this minimum business anymore, and in that way obviously, take up a lot of the negative earnings momentum out of the picture. So you talk about strategy for retail relative to the P&L. And then last question is just to follow up on the commentary about getting value for the patents. Specifically, are you looking at licensing, selling or charging off portions of your patent portfolio to those people that are experts and that’s their business? And take it off your plate and off your expense side?

Thomas Rogers

On the partner sub front, we've been talking for some time about how our MSO operator sub trends will go positive as these deals begin to kick in. They've just begun to kick in. We're just getting some nice contributions from Virgin and a couple of other operators, and they've turned positive off the back of that. We have Charter and ONO and DIRECTV and Comcast and others to kick in. And with that, we expect that positive sub trend on the operator front to accelerate. It's probably worth noting that in terms of our overall subs, including our retail subs, that we're somewhat negative, but based on the retail sub count, but with the accelerating MSO sub count, we're hoping in the relative near future for our overall subs to go positive. I would say that the retail situation is one that -- the important context here is just how conservative we've been on the sales and marketing. I mean, we are x a couple of write-off elements that we took in the quarter that go against that. You're really looking at sales and marketing being around $2 million a quarter in terms of maintaining our brand at retail, which is a fairly minimal investment given the size of our awareness of our brand. We do have some things that can accelerate that like the Comcast deal that you know, which is kind of a hybrid deal where we drive through a retail purchase and cable operator marketing and installation effort that we think will help to contribute nicely to the retail count. I also want to mention the CableCARD element which is generally not known by consumers yet. There's not only, has a lot of friction been taken out of the whole CableCARD process by virtue of the new FCC rules, but to actually start getting credits on your cable bill when you bring to the table a third-party non-MSO box device, begins to change some of the economics of being a TiVo subscriber. It's also worth noting that yes, while we have some of these old DVRs, standard definition single tuner churn, that continues to go on. Those subs shurning off are churning off at lower ARPU than our newer retail subs are coming on. In fact, with our new pricing at $19.99 a month, we are getting a quite substantial increase on the new sub that comes on versus an old sub that comes off. And in our overall ARPU, including all of our legacy subs, to see a 5% increase in our ARPU, that does demonstrate that the strength and value of that retail component of our business is improving. We do have some other strategies on the retail front that we are optimistic will contribute to some decent growth there and to leveling that component of our business. But just on the factors I've mentioned, and of course, the retail contribution of being in Best Buy in the Insignia sets, we think we'll begin to see a somewhat, change here. On the patent front, I really don't have anything to add in terms of discussions of specific strategies. You certainly mentioned some that are worthy of consideration there. We do see that there are all kinds of players who are interested in participating with companies in the -- recognizing the value of their patents. We certainly want to make sure we are smart about the improved environment for monetizing patent value. We've made no decisions, we're in the middle of that process and we're considering a number of options.

Operator

Your next call comes from the line of Mark Argentino (sic) [Argento] with Craig-Hallum Capital.

Mark Argento - Craig-Hallum Capital Group LLC

Just some more questions around kind of your current -- the licensing that you've done of your IP. In particular, if you look at some of the legacy deals you have, in particular, with Comcast, Cox, do those guys have licenses to the IP, along with what you've already done? Or is there an opportunity to go back to those guys if you start to kind of go out to more of a licensing program to be able to maybe extract or monetize those relationships more effectively?

Thomas Rogers

We have licensing deals in place with certain operators. Don't want to get into a discussion as to which operators we have licensing deals in place with versus others. But obviously, our first choice with any operator relationship is to seek a deployment, a strategic relationship where we drive our subscriber base and drive our economics off of fees. We, in cases where we do not think that we can achieve that, we've obviously had to pursue litigation. And obviously, in the case of one operator, successful litigation that has yielded a lot, it is fair to say that not all operator relationships, by any means, involve patent licenses. So without getting into the specifics of your question with respect to specific operators, not all operator relationships do involve a license to the patent.

Mark Argento - Craig-Hallum Capital Group LLC

That's helpful. And then when you look at the Insignia relationship with Best Buy, is that a straight license deal? Or how do you guys -- how is that, with our guests getting into specifics, but is that a straight license deal that you have to put in a bunch of R&D into that relationship? Maybe if you could talk about that model kind of the non-DVR middleware model, branded middleware model?

Thomas Rogers

Well, I'm not sure that, that model is necessarily indicative of most of the activity we have on there. But that deal, like most deals that we have, involve some element of NRE and license fee revenue to us. And the nature and combination of those deals differ depending on what kind of operator, what kind of deployment but those characteristics were present in that deal as well.

Mark Argento - Craig-Hallum Capital Group LLC

Last question. I know -- I think Anna had mentioned in your prepared remarks, talking about R&D spend and how next year, hopefully will be down. This year, it's higher because I think she used the term foundational deals. The foundational deals, the Charter type deals, the Virgin deals, are there other deals that got to go into the foundational bucket, so to speak?

Thomas Rogers

Well, I'd say foundational deals, the deals that we are working on that involve first-time combinations of integration, first time through with a particular VOD provider, first time through with a particular box provider to an MSO, various vendor combinations, architecture distinctiveness that they have that we haven't necessarily confronted before in terms of weaving our software through their systems. And as we complete more deals, we have done more combinations, it makes that work highly leverageable relative to another operator who may have that same combination of vendors or elements of the same vendor back phone. And each one -- each subsequent deal therefore is more leverageable, and more -- we can work more quickly and more cheaply. So obviously, your first time through deals, by definitions, don't involve combinations that you worked with before and so we tend to term those, foundational.

Operator

Your next question comes from the line of Tony Wible with Janney.

Anthony Wible - Janney Montgomery Scott LLC

I was hoping to get into a couple of things. The first thing is on DIRECTV. I know it's skewing the ARPU to a degree because of the revenue guarantee that you have in place. My question is, is there an escalator built into those guarantees as we look into next year? And in essence, what I'm trying to get to is, is there a financial motivation for DIRECTV to try and do something more with the box? And then I have one follow-up.

Thomas Rogers

Without getting into the specifics, those fees do escalate over time. Obviously, that issue aside, there are significant marketing obligations that DIRECTV has once the -- we have launched that exists, that's separate and apart from their obligations under the core licensing agreement. So I think they will have plenty of incentives to market based on those obligations.

Anthony Wible - Janney Montgomery Scott LLC

And then focusing a little bit on the IP. I think in your commentary, you indicated that litigation costs was expected to come down next year, if I heard correctly. Should we read into that, that you are feeling more optimistic that you won't have to go to court to monetize the IP and instead, you may see more settlements? Or is this just a function of you're taking legal kind of one step at a time? I know this is a compound question, but is there anything to stop you from waging kind of a 2-front war and going after some of these other people who are now acquiring companies and IP portfolios that would seemingly violate some of your patents?

Matthew Zinn

Let me -- the way we look at patent monetization and enforcement of our patents is, we look at a return on investment for our shareholders. So nothing's foreclosed. We have a lot of cash in the bank, we can decide to spend it any number of ways. So we look at things opportunistically, and I don't think we're going to forecast any direction we're going in. But I don't think we're resource constrained in terms of pursuing any particular opportunity.

Derrick Nueman

Tony, this is Derrick. From a guidance perspective, we are just looking at what's currently on our price. Obviously, if something else makes sense, it would be outside what we guided to.

Operator

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

Alan Gould - Evercore Partners Inc.

First, I was wondering if you could give us a date of the TiVo Verizon and Microsoft cases?

Matthew Zinn

Currently scheduled for October of this year...

Alan Gould - Evercore Partners Inc.

All 3?

Derrick Nueman

As these can change, but that's the current schedule and that's how we budgeted and forecast it.

Alan Gould - Evercore Partners Inc.

Okay. Second, Anna, deferred revenue increased by over $100 million in the quarter. Should I assume that was all due to this payment by DISH?

Anna Brunelle

Yes, it was. We received $300 million at the beginning of the quarter, and we haven't fully recognized all of that payment yet, so it sits on the balance sheet in deferred revenue, and it will be recognized $11 million a quarter.

Alan Gould - Evercore Partners Inc.

Okay. And when did the V Med boxes begin rolling out? Was that 50,000 achieved in a month or was that a 3-month period?

Thomas Rogers

That's over a 3-month period, Al.

Alan Gould - Evercore Partners Inc.

Okay, so they rolled it out all quarter. And lastly, Anna, you did say R&D would become more efficient next year. Any -- would you like to quantify what that means in terms of -- I assume that means a lower R&D next year?

Thomas Rogers

Efficient means lower, I wouldn't quantify it beyond that. I mean, as I was speaking about it before in terms of leverageability of implementation, certainly, subsequent implementations becoming cheaper is a major goal. We're making a lot of investments now in our core R&D in our core code to make it more leverageable in terms of how we are able to drive forward various R&D projects, and we hope to make some efficiency moves on that front as well. So on both the overall core R&D and our implementation elements, both of those we're looking to bring down somewhat.

Alan Gould - Evercore Partners Inc.

And I guess last thing. Tom, you did say DIRECTV -- you've started manufacturing the boxes for DIRECTV. That implies that they have approved the code and everything? With testing phase in that ...

Thomas Rogers

[indiscernible] of the boxes but the boxes are in the manufacturing process with our code having been delivered. So that is all going forward now. And when the manufacturing is done, they need to be shipped back over here and then put into the market place for launch, and we will let DIRECTV speak to the specifics of that as the day gets closer.

Operator

Your next question comes from the line of Michael Cohen with MDC Financial Research.

Michael Cohen - Sinova Capital

My question is about the upcoming TiVo and AT&T case as scheduled through October 4. It appears that you're requesting a status conference in both cases, and it appears that the AT&T case, you want to keep for October 4, is where the Verizon case you're hoping to push out to early next year. I was wondering if you could talk kind of generally about the possibility of splitting those 2 trials?

Matthew Zinn

We can't comment too much. The cases are separate today. So there's some commonalities, but there are different products being accused. Obviously, AT&T's products are different than Verizon's products. If Folsom wants to try some of the issues together, he can. He held a joint claim construction. But we can't really comment on the timing of these things. Like we said, they're both scheduled for October. We're happy to have those cases heard in October but we can't control when Folsom's going to actually have the trials. If he wants to have one before the other, we're perfectly fine with that. Obviously, the defendants are trying to delay and give themselves more time for events to develop in the meantime. Microsoft is -- has a case against us with the International Trade Commission. That's due for trial in December. Obviously, they're trying to gain things with that. So we really can't predict when these things are going to happen. All we can do is budget for what's in front of us and forecast for what's in front of us.

Michael Cohen - Sinova Capital

The previous scheduling orders have both cases on October 4 or your both trials starting on October 4 with the same judge. So is it safe to assume that previous plan was to hold both trials together?

Matthew Zinn

The current plan appears to be for Judge Folsom to hold both trials together. That very well may change, but that is the current plan. Now is he going to hold those things concurrently? Is he going to have 2 juries and panels? We don't know the details of what he's planning there yet. And that's why we want to schedule in conference to kind of iron out some of these details.

Michael Cohen - Sinova Capital

Got it. My final question is for Tom. I was wondering if you could just kind of broadly talk about where things stand with regard to Time Warner? And if that might be a potential litigation target or something down the road?

Thomas Rogers

Well, we don't comment specifically on where we are with any operator. I'd say that broadly with the cable industry, we have become a real ally in their need to drive forward with their advanced television product. Most of the traditional cable box vendors have let the industry down, including the vendors that the big guys have been relying on in the past. I think it's fair to say that some of the big digital company players that are interested in the TV space are ones who haven't shown a lot of worth or friendliness toward the cable operator relationship with their subscriber, and so there's a lot of skepticism in the cable industry about players like that. And we, I think, have come up with a model that works well for the cable industry, provides a fairly rapid way for them to get deployment of a very sophisticated, complex system that meets the challenging needs that all operators, including the big ones like Time Warner and Comcast have. And we're going to continue to grow our base as best we can in the cable industry, both in the U.S. and abroad.

Michael Cohen - Sinova Capital

Your offering definitely look like it makes sense for Time Warner. Would you say that your success with EchoStar has somewhat changed the dynamics with regard to discussions with them?

Thomas Rogers

Well, I would say that the entire industry is more cognizant of the value of our patent portfolio and recognizes that if we need to, we will enforce our patent portfolio if we conclude there is no basis for being able to put in place a commercial relationship. As I said, we focus on putting in place commercial relationships. We're particularly focused doing so with the cable industry. And we obviously have our other options, to the extent we concluded at some point that that's not possible.

Operator

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

Richard Tullo - Albert Fried & Company, LLC

Albert Fried and Company. Do you expect the recent bid for MMI from Google to have any influence on the upcoming trials as far as MMI looking for a delay or anything like that?

Matthew Zinn

We don't expect it to have any impact in terms of MMI looking for a delay. In the Verizon case, there've always been looking for a delay. The delay is getting into the case for 18 months. Google is not going own MMI for some period of time. And even when they own them, I can't imagine it's going to change very much over there.

Richard Tullo - Albert Fried & Company, LLC

Strategically speaking, since the deal's been announced, is there any additional inbound interest for TiVo set-top boxes by the industry basically as a supplier relationship, but given that Google has been seen as an interloper for the industry, and I would expect some MSOs to look for alternatives to MMI specifically?

Thomas Rogers

Well, our domestic relationships with the cable industry revolve around our providing both a hardware and software solution. So our set-top boxes are very much a part of what allows cable operators to deploy with the speed that we've been able to provide them. Our combination of hardware and software is an attractive package, and operators have found in some cases, that our hardware is actually less expensive and less sophisticated stuff that the traditional vendors have put in front of them. So we've already been very, very successful in getting the hardware elements of what we provide in place, and we're expanding those hardware elements with whole home solutions. As we've talked about in the script today, that non-DVR set-tops is something we're beginning to push out with some operators and we'll begin to be pushing out. And also more sophisticated DVRs with 4 tuners that really begin to provide a way for cable operators to think about TiVo in a whole home context. So the benefits of our hardware beginning to be very well understood.

Matthew Zinn

It's also worth mentioning that TiVo has no dispute with Motorola. TiVo didn't sue Motorola. Motorola ended up suing TiVo 18 months after we sued Verizon, and it's not entirely clear why they did that or why they waited. Obviously, they have some kind of indemnification discussion going on with Verizon. But our dispute is with Verizon, it's not with Motorola. And we worked with Motorola on a business level with a number of our operators. So the legal wranglings are separate from business, just conducting business and serving mutual clients.

Richard Tullo - Albert Fried & Company, LLC

That's good to know. With DIRECTV, if the rollout is successful, is there any hindrance from them rolling out into Latin America? Or would that require a separate deal? As Latin America is a bigger part of your business obviously.

Thomas Rogers

Latin America distribution through DIRECTV is not contemplated through our current deal. We obviously are talking to players in Latin America about the value of rolling out our overall user experience.

Richard Tullo - Albert Fried & Company, LLC

And last question, is the Insignia deal exclusive to Best Buy or can any interested CE company buy into that platform? And is there anything in the Rovi deals that prevent them from using another provider?

Thomas Rogers

Well, I'm not going to comment on the last matter. That's for them to talk to. But no, we have the ability to work with other consumer electronics manufacturers.

Operator

At this time, there are no further questions. Mr. Tom Rogers, are there any closing remarks, sir?

Thomas Rogers

Thank you, everybody. Appreciate that these last days of summer dialing in and listening to our progress. We really do believe that with the operator subs going positive this quarter, we're beginning to show tangible evidence of what our whole operator thrust could become. And as more and more of the R&D becomes leverageable as we begin to be able to show how the EBITDA and revenue model strengthen off the back of those elements and others, we think we can continue to show that the overall TiVo model is one that will be providing great strength going forward. Thanks everybody for dialing in and update you more as we go.

Operator

This concludes today's second quarter fiscal year 2012 earnings call. You may now disconnect.

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