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TiVo (NASDAQ:TIVO)

Q3 2012 Earnings Call

November 22, 2011 5:00 pm ET

Executives

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

Derrick Nueman - Investor Relations Professional

Naveen Chopra - Senior Vice President of Corporate Development & Strategy

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

Thomas S. Rogers - Chief Executive Officer, President and Director

Analysts

Richard Tullo - Albert Fried & Company, LLC, Research Division

Michael Cohen

Todd T. Mitchell - Brean Murray, Carret & Co., LLC, Research Division

Anthony Wible - Janney Montgomery Scott LLC, Research Division

Barton E. Crockett - Lazard Capital Markets LLC, Research Division

Daniel Ernst - Hudson Square Research, Inc.

Alan S. Gould - Evercore Partners Inc., Research Division

David W. Miller - Caris & Company, Inc., Research Division

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 TiVo Third Quarter Fiscal Year 2012 Conference Call. [Operator Instructions] Mr. Derrick Nueman, Head of Investor Relations, you may begin your conference.

Derrick Nueman

Thank you, and good afternoon. I'm Derrick Nueman, TiVo's Head of Investor Relations. Welcome to the Third Quarter Ending October 31, 2011 Earnings Call. With me today are Tom Rogers, our President and CEO; Anna Brunelle, our CFO; Naveen Chopra, SVP of Business Development and Corporate Strategy; and Matt Zinn, our General Counsel. We have just issued a press release and 8-K detailing our third quarter financial results. We also posted a third quarter key metric trend sheet on our Investor Relations website. You may also access a recording of this call on our website over the next 2 weeks. Today's remarks will last about 30 minutes and will be followed by a question-and-answer session.

Our discussion today includes forward-looking statements about TiVo's future business and growth strategies. We caution you not to put undue reliance on these forward-looking statements as they involve risks and uncertainties that may cause actual results to vary materially from our forward-looking statements. Factors that may cause actual results to differ materially are described under Risk Factors in our annual, quarterly and current reports with the Securities and Exchange Commission. Any forward-looking statements made today on this call reflect our analysis as of today, and we have no plans or duty to update them.

Additionally, some of the metrics and financial information provided on today's call are non-GAAP metrics. Please see our third quarter fiscal year key metric trend sheet on our Investor Relations website for a reconciliation.

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

Thomas S. Rogers

Thanks, Derrick. Good afternoon, everyone. This was a great quarter for TiVo and one that represented a significant step forward in our growth strategy where we are focused on demonstrating our ability to execute on our current distribution deals to maintain leadership in advanced television and to continue to invest in our business to further extend that leadership. In addition, we posted solid financial results in the quarter. We grew our quarterly service and technology revenues by 25% year-over-year and exceeded guidance on service and technology revenues, adjusted EBITDA and net loss.

The first byproduct of our focus on distribution execution was making our MSO subscription growth positive in the second quarter. This quarter, built on that momentum as we have now put our total subscription growth on a positive trajectory, where we have increased overall subscriptions by 117,000 to more than 2 million. This success was driven by our mass distribution relationships where Virgin Media has now deployed its TiVo offering to more than 220,000 TiVo customers as of the end of October, and RCN has driven significant deployment of its TiVo offering and recently expanded its relationship with TiVo to a whole home solution.

Further, we recently began deployments with Grande Communications and ONO, the largest cable operator in Spain, and we expect Charter, the fourth largest U.S. cable company, to launch very soon. Lastly, DIRECTV will be launching in early December, and integration with Comcast video-on-demand service is now in field trials. We expect all of those initiatives to further contribute to our growth going forward.

The strategic deals with pay-TV operators we just mentioned provide us a potential to reach over 10 million homes on an exclusive or primary basis. Moreover, we have just begun to scratch the surface of this potentially huge opportunity. TiVo is one of only a few companies that offers an advanced television solution, and it's become clear that outside a very small number of operators in the world who are willing to absorb the massive expense of trying to build an advanced television solution on their own, all other operators are going to need an outside third party to provide a cost-effective solution for them.

Now let's discuss what's behind our growth in greater detail, starting with mass distribution. Our mass deployment efforts are proving successful in gaining momentum with pay-TV operators worldwide. These operators recognize the urgent need to retain their position as the key providers of the video experience for consumers. They're increasingly turning to TiVo for help because we have proven we can quickly deploy an effective advanced television solution, which gets exceedingly more value out of the television experience by joining traditional linear TV channels with broadband-delivered content while vastly upgrading the entire user experience. All of this helps to combat the subscriber declines operators are facing of late.

Importantly, it's recognized that cable's great competitive advantage in the U.S. is high-speed broadband connectivity, and not only does TiVo make the cable video product best-in-class, at the same time it drives greater use and perceived value of the broadband offering, which plays to the strategic objectives of all cable operators.

As for what operators think about TiVo, their own words say it best. Neil Berkett, CEO of Virgin Media, said on the latest earnings call, and I'm quoting here, "So how are customers finding it? Well, they love it. Our net promoter score or customer satisfaction is much higher for TiVo than our legacy TV product. In fact, TiVo customers are twice as likely to recommend Virgin Media to their friends, telling their friends and their family about the game-changing technology, about the content discovery and about their control. TiVo is facilitating a personalization that customers want. It's liberating them and putting them in control of their own viewing. 80% said that TiVo gives them more freedom to watch TV when they want it, 50% are watching more catch-up TV."

For Virgin Media, the TiVo offering is quickly growing throughout the U.K. and in just 6 months since launch, Virgin Media reported that it had more than 220,000 TiVo subscribers live, up from 50,000 just 3 months earlier. What's even more impressive is that 40% of these TiVo users are new subscribers to Virgin Media.

Another example is RCN. As RCN has put it, and again I'm quoting here, "Since our initial deployment of TiVo, we've seen higher customer satisfaction, lower churn and increased video-on-demand usage in homes with TiVo Premiere. The TiVo whole home bundle from RCN now allows our customers to take even more control of their TV watching experience and entertainment. And the whole family can watch what they want to watch, when they want to watch it, together in one room or simultaneously in separate rooms. It's abundantly clear that TiVo understands the future of television and offers up solutions that benefit both consumers as well as cable and broadband operators like RCN."

We've had an excellent reception for our TiVo Premiere offering from RCN customers over the past year. To that end, we are pleased that RCN is now expanding its suite of TiVo offerings to become the first pay-TV operator to deploy what cable operators have been seeking for a long time, which is a way to get the TiVo user experience distributed more broadly in the form of a non-DVR set-top box. This is an indication of how operators want to use TiVo as an interface for an entire whole home experience.

In addition to Virgin Media and RCN, we are excited that ONO recently launched its TiVo offering. ONO is providing to its customers a major new upgrade to its video product wrapped together with the TiVo experience. Early reception has been positive evidenced by the 32,000 preorders ONO recently disclosed. As we roll out the most advanced television viewing offering in Spain, we believe ONO will experience customer satisfaction improvements similar to those of Virgin Media.

In the U.S., Grande Communications launched our product just 2 months following our announcement, highlighting how prior implementations can be leveraged quickly for incremental distribution. Further, Charter recently stated they will complete a full production launch in Texas and conduct pilots at a few additional markets later this year, with a full production launch enterprise-wide in the first half of 2012.

Finally, DIRECTV has informed us that they intend to launch the TiVo DIRECTV product in select markets in December. We're excited to be able to offer a new TiVo-enabled platform for those DIRECTV customers who have been looking forward to enjoying DIRECTV's great lineup of programming with TiVo's renowned user interface.

As you can see from the numerous deployment milestones I have just summarized, we continue to experience unprecedented momentum with our distribution partners around the world. This momentum is driven first and foremost by the fact that we have a unique proposition for operators, which combines the gold standard for a television user interface, a track record of innovation performed by some of the best and brightest in Silicon Valley, all packaged within a brand that is synonymous with consumer friendliness and ease of use.

In fact, our track record in on-demand television, starting with the introduction of the DVR, is truly second to none. We were the first broadband connected set-top box, the first to deliver broadband video such as Amazon or Netflix to a set-top box, the first DVR to enable sharing of content to other devices. And we remain the only solution that provides a fully integrated search and discovery experience across linear video-on-demand and over-the-top content sources. We plan to maintain that pace of innovation going forward, which we think will further distinguish us in the marketplace and continue to fuel our distribution momentum.

For example, this quarter we were one of 3 companies, Netflix, Hulu and TiVo, highlighted at Facebook's SA conference in conjunction with the important work we are doing with Facebook to incorporate social network behavior into the television discovery experience. Further, we're uniquely positioned to do it because we are one of the only players whose technology already integrates traditional QAM delivered linear television with content distributed directly via the Internet. And our MSO customers tell us this experience positions us well as set-top boxes evolve into gateway devices and for when the user experience is fully delivered from the cloud.

Now let's briefly turn to our retail business. Looking at our path to growth, we believe meaningful penetration within our current distribution deals and potential new deployment deals, along with stabilizing our TiVo-Owned business where churn is slowing and new subscriptions are coming in at much higher subscription fees, is setting the foundation for long-term growth.

As such, we will continue to focus on ways to efficiently drive more increased retail TiVo subscriptions, including through opportunities such as the upcoming integration of Comcast VOD with our retail product, which is now currently in field trials and will be the first retail set-top box to combine traditional TV channels, operator-provided video-on-demand and broadband content in one user experience with TiVo's universal search capability and TiVo's stunning HD user interface.

Additionally it's worth noting that Comcast will be providing marketing support and free installation for this product. We believe this, along with other opportunities, will position our retail business to meet our goal of supporting our growth prospects over time.

Turning to our advertising and audience research and measurement business. TiVo's advertising solutions continue to be an important offering for brands, advertisers and networks looking to grab the attention of the time-shifting viewer in a nonintrusive way. During this year, we have delivered 1.95 billion interactive ad impressions thus far out of our advertising clients, which compares very favorably to many large cable operators' interactive advertising offerings. This number is derived from just our current base while we continue to focus on creating opportunities for advertising growth off of our operator deployments.

In addition, we continue to believe there is tremendous value in defending our innovation and intellectual property. We are pleased with how our case against AT&T and Microsoft in the United States District Court for the Eastern District of Texas is progressing after receiving what we believe is a positive claim construction and with a trial currently scheduled to begin in January. As we continue to evaluate how to maximize the value of our patent portfolio and accelerate our television operator deployments around the world, we are very focused on making sure that the significant value, which we believe our patent portfolio represents, is understood. Presently, we believe there is no better path to showing this than through battle testing our patents in litigation.

In closing, this is an exciting time for TiVo as we head down the path to sustained growth marked by returning our total subscription numbers to positive growth and exceeding guidance in our financial results. Looking into our next fiscal year, we are focused on improving adjusted EBITDA and achieving success in 4 key areas: executing on current distribution deals we have in place, signing new distribution deals, reducing R&D and litigation spend over time and protecting our intellectual property. As these 4 key areas play out, TiVo is well positioned to create shareholder value.

With that, I'll turn it over to Anna.

Anna Brunelle

Thank you, Tom, and good afternoon, everyone. This quarter was a significant one for TiVo as our efforts to grow our business are beginning to show results. Our quarterly service and technology revenue grew over 25% year-over-year. We exceeded adjusted EBITDA and net income guidance, and our total subscription base grew for the first time in over 4 years.

Now getting into the quarter. Service and technology revenues were $51.8 million, again, up over 25% year-over-year and exceeded the high end of our guidance range. Our cost of service and technology revenue was $17 million. Our net hardware loss was $3.8 million, which was driven by our retail channel.

Operating expenses were $54.5 million, which came in slightly better than our expectations, but were slightly higher than the prior quarter due to an expected increase in R&D and litigation spend. Litigation was $8.2 million in the third quarter as we prepared for trial activity with AT&T and Microsoft.

Interest and taxes were roughly $1 million, which led to a net loss for the third quarter of $24.5 million or a loss per share of $0.21 using a basic share count of 117 million shares. Adjusted EBITDA was a loss of $13.9 million, beating our guidance of a loss of $17 million to $19 million.

Turning to the balance sheet. We ended the quarter with $604 million of cash and short-term investments. It is worth noting that we recognize $11 million of DISH licensing revenue each quarter but receive an annual cash payment of $44 million each second quarter through fiscal year 2018. This timing difference was the primary reason why our cash burn exceeded our adjusted EBITDA in the third quarter. Additionally, on the capital allocation front, we already authorized $100 million stock repurchase plan, and we expect to be opportunistic on any significant stock weaknesses.

Now turning to our third quarter subscription metrics. As Tom noted, we returned to total subscription growth driving 117,000 net additions, which increased our total subscription base to over 2 million subscriptions. We expect this momentum to continue as Virgin, RCN and Suddenlink continue their respective rollouts and as recent and upcoming launches from Charter, ONO and Grande begin to contribute to subscription growth.

Quickly touching on our TiVo-Owned business. We saw an improvement in our net subscription trend as our churn decreased significantly while our gross additions slightly increased from the second quarter. Additionally, our subscription acquisition costs were higher this quarter compared to the prior one due to the typical retail sell-in ahead of the holiday season, and we expect to see lower subscription acquisition costs in the fourth quarter.

Before getting into guidance, I wanted to briefly comment on the recent flooding in Thailand. Based on the situation today, we don't see as of now significant impact to our deployment efforts as we continue to receive adequate allocations of hard drives. We do not anticipate a significant financial impact from the increased hard drive pricing in the fourth quarter. Our guidance reflects our current expectation of less than $1 million of impact to the fourth quarter. However, this remains an evolving situation, and one that we will continue to watch carefully.

Getting into our fourth quarter guidance. We expect service and technology revenues of $48 million to $50 million, adjusted EBITDA to be in the range of negative $21 million to negative $23 million and our net loss in the range of negative $31 million to negative $33 million. With that, let me provide you with a few key items that are impacting our fourth quarter guidance.

First, we are expecting lower technology revenues compared to the prior quarter. As a reminder, our technology revenue varies from quarter-to-quarter due to the specific work we are performing for operators at any given time.

Second, we're expecting a sizable jump in litigation spend, both compared to Q3 and the year-ago quarter due to significant activity in the AT&T and Microsoft cases, including a trial in Marshall, Texas in January and an ITC hearing in December. We expect these elevated levels of spend to decrease in the first quarter of fiscal 2013 based on current anticipated litigation activity.

Third, our expectations for our current fiscal year R&D spend remain consistent with prior guidance. Due to the large amount of foundational projects we are currently working on, we expect to see an increase in Q4 R&D relative to Q3.

Finally, I wanted to reiterate the comments we made on last quarter's earnings call relating to the 2013 fiscal 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. We believe this will lead to a significant improvement in our adjusted EBITDA results for fiscal year 2013 when adjusting for the $175 million in past damages from DISH, which we recognized earlier this year.

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 Tony Wible with Janney.

Anthony Wible - Janney Montgomery Scott LLC, Research Division

I was hoping you could talk about some of the goals that you laid out for next year. You specifically mentioned adding new MSO partners. What part of the globe do you think represents the biggest opportunity for you? And I know I asked last quarter about Latin America, but any updates there?

Thomas S. Rogers

Tony, this is Tom. Well, as a general matter, we think that there are several hundred million subscribers that are owned by operators who are going to have to go through a transition in the next 2 to 3 years to advanced television, and I think different parts of the globe will go through that transition at different times. I think near term, now, next year, North America and Western Europe will be the places where you have operators most engaged in the discussions necessary to make those decisions to make the transition to advanced TV. So our efforts are most focused there, but by no means exclusively focused there, and I take your point on Latin America and I'd say same about certain pockets of Asia. But it's a very large opportunity given the number of subs owned by the number of operators that got to go through this transition.

Anthony Wible - Janney Montgomery Scott LLC, Research Division

Great. And last question, could you give us a sense on what the incremental margin contribution is for these new MSO subs as they come on?

Thomas S. Rogers

We really don't speak to the margin contributions. I will say that new MSO subs, as they come on, obviously contribute in a significant way once we get past the R&D costs associated with the development of those activities. As you know, unlike the retail front, we don't have -- we don't bear the marketing expense, and so the opportunities there in terms of margin flow-through once we get through those development costs are very substantial. We do have some ongoing service responsibilities and maintenance responsibilities generally under those agreements. But as we get past the core R&D development activity, that flow-through is very good.

Operator

Your next question comes from the line of David Miller with Caris & Company.

David W. Miller - Caris & Company, Inc., Research Division

Just a couple of questions. Correct me if I'm wrong, wasn't the share buyback program announced on the last earnings call, or was it before that? And if it was before that, did you buy any stock back in the quarter? It doesn't look like it.

Thomas S. Rogers

It was before the last earnings call, and no, we did not buy anything back during the quarter. As Anna said in her script, we'll continue to look to be opportunistic on price dips, but we did not do so in the last quarter.

David W. Miller - Caris & Company, Inc., Research Division

Okay. And then just a question for your General Counsel. Matt, if you're on the call, what's your assessment of why the AT&T and Verizon cases were not heard in tandem? We were under the impression that both cases would be heard in tandem, and now we're a little confused, as I think some other folks are on the call as well, as to why they've been separated. And with that separation, what's the time lag in your opinion as to when or if there's a conclusion to both cases over the next 2 or 3 months?

Matthew Zinn

Well, the cases are only separate cases. They were filed on separate suits. There have been some overlapping issues, with claim construction in particular, that the judge held in tandem, but they've always been separate cases. They're separate operators. There are separate technologies involved. The AT&T technology differs from the Verizon FiOS technology. So we've never had an expectation that they'd necessarily go to trial at the same time. The AT&T case is scheduled to begin trial January 9. The Verizon case has been stayed until -- there's a hearing on January 4. So there's going to be a lag between the 2 of those cases. Right now, we're focused on the AT&T case and obviously doing our best to be successful in that case, and then we'll move on to the Verizon case.

Operator

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

Barton E. Crockett - Lazard Capital Markets LLC, Research Division

I was wondering if you could provide a little bit more discussion of why there was a drop in the average revenue per user in the quarter both at the third-party line $165 from $193 and also on the stand-alone subs, both have been trending in a different direction for a number of quarters then we saw a reversal here. What happened there? Is it noise or something that continues beyond here?

Anna Brunelle

Yes, this is Anna. I think there are 2 different implications. On the MSO side, you may remember on previous discussions how we've talked about that the DIRECTV minimums were driving up the MSO average ARPU. And as a result of having new subs coming on from other operators, we're seeing that trend back down a bit. So I think that should be in line with expectation. On the stand-alone side, the TiVo-Owned side, we happen to see in Q2 -- we don't carve out our ad and ARM business. But in Q2, we happen to see a bit of a bump there, and that contributed to the increase in Q2. And so in Q3, we're just back on trend.

Derrick Nueman

Barton, this is Derrick. We continue to see our stand-alone subscribers coming in at higher incremental ARPUs than our overall average. So over time, we should continue to see some inflation in the TiVo-Owned ARPU.

Thomas S. Rogers

I think I'd add just one other point there that in the quarter, if you backed out the added ARM revenue from the ARPU, you actually would've seen quarter-over-quarter ARPU growth, so that you would've seen continuation of the trend based on what Derrick said. New subs are coming in at much higher monthly revenues than old subs.

Barton E. Crockett - Lazard Capital Markets LLC, Research Division

I'm sorry, could you repeat that? What was the thing that you should back out?

Thomas S. Rogers

You back out the advertising and audience research elements that Anna was referring to that caused the bump in revenue in the second quarter, meaning ad and ARM performed particularly well in the second quarter. Revenue from ad and ARM were down somewhat in the third quarter. That caused an ARPU overall in the second quarter to look higher than the third quarter. But if you backed out the advertising and audience research revenue in both quarters and just compared the ARPU subscriber revenue to subscriber revenue, it would've picked up consistent with what Derrick said, which is you're seeing new subs coming on, on much higher monthly revenue.

Barton E. Crockett - Lazard Capital Markets LLC, Research Division

Okay. And then on the SAC, $296, I understand there's a seasonal sell-in impact, but it's still larger in this quarter than it has been for a couple of years. Is that something that continues with seasonal kind of variations at an elevated level versus previous years? Or is this kind of set a new baseline for the trend, or is there something unusual about this quarter?

Anna Brunelle

I think there are a couple of things that play here. One you picked up on, which is the sell-in in Q3 that fills the retail channel in Q4. That's a traditional seasonal element that you can probably go back to prior years and see. I think the other thing that's trending slightly differently is you may remember that in the fourth quarter of last year, we changed our pricing structure a bit such that we're now charging less money for the hardware box and a higher service revenue element. And so that has been reflected in the SAC numbers as well.

Thomas S. Rogers

Just to refresh your memory on that, Barton, in the third quarter last year, our primary price offering was a $299 box and something in the order of $12.99 monthly fee, and we've moved as you know in the last year to a $99 box and a $19.99 fee. And that additional hardware subsidy obviously drives something significant in the SAC. That's an awful lot of it.

Barton E. Crockett - Lazard Capital Markets LLC, Research Division

Okay. And then just one final thing here on Thailand, is there -- when you talk about $1 million -- under $1 million impact, is that just referring to your stand-alone boxes that you're selling directly, or is there some impact that relates to your third-party distribution deals?

Anna Brunelle

The impact that we noted that was less than $1 million included all of our relationships.

Operator

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

Daniel Ernst - Hudson Square Research, Inc.

Three questions if I might. First, I'm very pleased to see some metrics around the advertising area, which is an area that I think that you guys done some innovative things over the years and we haven't seen a lot of financial credit. Can you talk a little bit about what the financial impact of ads are and where your CPMs are tracking for those ads relative to digital ads for digital Internet advertising versus video advertising versus television? And then two, on the R&D expense, can you give us a sense of what the mix is of R&D focused on, your stand-alone subs versus R&D that's driving towards the partner subscribers? And then third, now that so much of the growth, and we're finally seeing overall growth, is coming from the very broad distribution that you manage both domestic and global, is there a thought here to scale back the losses you're generating on adding subs for your domestic business, your owned and operated business?

Thomas S. Rogers

Sure. On the advertising side, we obviously until this quarter where we've begun to establish a positive trajectory in our subs, we had been suffering subscriber declines. And as advertisers looked at that, you would think that we would have a more difficult time driving our ad solutions. In fact, the innovative nature of the ad solutions have kept the ad revenue reasonably consistent over time, which does tell you something about pricing as subs have gone down, revenues been fairly consistent. The pricing on it has been pretty good. Note that as we look at these operator deals domestically, and we do look at getting significant rollouts, we have held onto the advertising rights in various ways and we do look at that as a real opportunity going forward. We wanted to dimensionalize that even when you're talking about our current base, just how much there is by way of interactive impressions, and that really does compare very favorably with some of the interactive impressions that some very large MSOs have put out there. And so as our base grows, we think we can really have a leadership position in not only the innovative nature of the inventory but the quantities that it can provide. When it comes to the R&D expense, there was a time not long ago where we really did have to look at our R&D as being relatively bifurcated that we had MSO development, and we had retail development and the two did not leverage each other very well at all. We've gotten into the point now that most of our development serves both sides of the equation, and we are investing substantially additional dollars this year in part toward rebuilding, or I should say building a common code base that further incorporates all elements of our R&D into a singular code approach so that we can maximize the leverage of that and not have inefficiencies that might flow from having separate development efforts on the retail and operator front. On the issue of scaling back our ONO activity, when we add a sub at the kind of ARPUs that we're now getting, that's a profitable subscriber for us. And we are certainly mindful of the fact that SAC costs and what SAC costs need to be at in order to maintain that. But our advertising and marketing for the retail business amounts to $2 million or so or less a quarter. And I think we have that within a realm that is quite manageable from the point of view of it driving value for the business. And let me remind you that the Comcast deal that we alluded to, that is now in field trials and we'll be launching early next year is a deal that is a retail MSO hybrid arrangement, meaning while we are taking the Xfinity product and building it into TiVo and Comcast will market and install the TiVo product, it will be paid for as a retail product, meaning the upfront $99 by the consumer. And we think that's an attractive model for certain MSOs. And with that, we think we'll also take out some of the friction in the CableCARD installation process that has obviously been an inhibiting factor in the business. So we see some elements there and elsewhere that we think will be helpful to growing the retail business going forward.

Daniel Ernst - Hudson Square Research, Inc.

Great. And just a follow-up on the advertising, what percentage of your reach now in the international or domestic partner MSO subs includes advertising? And is that something that we could see scale up within the next year? Or is that more of a much longer term opportunity to bring your advertising technology and revenues associated with it to the MSO subs?

Derrick Nueman

Dan, we don't break out specific numbers. But generally, as our MSO subs gain, especially in the U.S., gain traction, we'll be able to put advertising against it.

Thomas S. Rogers

I think it's fair to say that all of our deals incorporate some advertising component. The priority that we put against those elements in terms of rollout differs from deal to deal and certainly from market to market. Obviously in the U.S., we're going to be further ahead than we are internationally just given the size of the existing base.

Operator

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

Alan S. Gould - Evercore Partners Inc., Research Division

I've got a couple of questions. First, for either Tom or Naveen, I'm sure you guys are out there talking to all the distributors. Any sense on the timing of their movement to advanced TV? Are there more RFPs or anything that can give us some guidance as to how quickly this is moving?

Thomas S. Rogers

Naveen is out with them, many of them regularly. Naveen?

Naveen Chopra

Yes, I think, Alan, just by way of your question, it sounds like you have a reasonable beat on some of these dynamics. I think it's fair to say that we're in advanced discussions with a number of these players, both domestically and internationally. The progress that we've made with people like Virgin, RCN and Charter is very visible on a number of fronts, both in terms of the success they've had in the marketplace and some critical technology developments that are involved in each of those programs that other operators can benefit from. Unfortunately, we obviously can't speak about specific deals we're engaged with until we get to a point where they're ready for public announcement, which we hope will be in the coming months with a few of those. But I think we're obviously emboldened by the fact that although we don't have complete control over the speed of that decision process and we would always like it to go faster, we do feel good that when ultimately that decision is being made by the operator, we performed very well relative to our competitors. So as much control as we can exert over that process we do, and hopefully a number of the discussions we're involved with today will soon come to fruition.

Alan S. Gould - Evercore Partners Inc., Research Division

Okay. And then I've got 2 quick ones for Anna. So you've got sequentially lower service and tech revenues. You said tech is down in the January quarter. Can you confirm that service revenue should be up sequentially?

Anna Brunelle

I'm sorry, can you repeat the first part of the question about the January quarter?

Alan S. Gould - Evercore Partners Inc., Research Division

Yes. Your guidance is that service and tech revenue will be down in January sequentially versus the October quarter. You said tech revenue would be down given the higher sub base. Is it fair to assume, or can you confirm that service revenue should be up sequentially?

Anna Brunelle

Yes, that wasn't what I was implying actually, no. I think one thing you can take from my script that might help you though is that our tech revenues related to the work we do for operators in the third quarter was a bit higher than it typically runs. And as a result of that, we saw some slightly higher service and tech revenue in Q3 than what we're guiding to possibly in Q4 depending on how you build your models out.

Derrick Nueman

But Alan, I think a key point here is that the MSO trends will benefit us, and obviously, you've seen the trend on the TiVo-Owned sub.

Alan S. Gould - Evercore Partners Inc., Research Division

Okay. And then my last question is, can you give us some sense on the retail side what percent are taking the $20 monthly fee versus the $500 lifetime fee?

Anna Brunelle

We typically haven't given that information out.

Operator

Your next question comes from the line of Todd Mitchell with Brean Murray.

Todd T. Mitchell - Brean Murray, Carret & Co., LLC, Research Division

Two areas of focus. First of all, can you talk, without giving specifics about DIRECTV, and how you're going to be positioned on that platform vis-a-vis their own DVR? And also, in terms of the installed base of TiVos on DIRECTV, do you have access to -- I mean, do you know who to directly market to in the installed base? And the second question I have -- I have a follow-up question, but first take that one, I guess.

Thomas S. Rogers

Well, in terms of how we will be positioned, just to be clear at the outset, they will be initiating their launch in a number of major select markets in December and then early next year, roll out the product nationally. DIRECTV has obligations to nationally market us, and those obligations are substantial. So it is something that will be marketed in addition to their homegrown platform. We don't bear those marketing costs. They obviously know who the DIRECTV TiVo current customers are, and they know people who have previously had TiVo and have the product for a long time and presumably were satisfied customers. So they know both of those bases to direct their marketing to. I would expect some of their initial marketing will be focused on those very groups as it then rolls out more broadly to all DIRECTV customers.

Todd T. Mitchell - Brean Murray, Carret & Co., LLC, Research Division

So they have a commitment to spend a certain amount of marketing. Who assumes the equipment subsidy if there is one?

Thomas S. Rogers

All of the marketing and other associated costs with the service are borne by DIRECTV. We are paid a very substantial additional sub fee -- substantial additional sub fee beyond the original DIRECTV sub fee and the original DIRECTV-TiVo deal for incremental subs who buy the new platform. But all costs associated with the marketing, et cetera, the service are borne by DIRECTV.

Todd T. Mitchell - Brean Murray, Carret & Co., LLC, Research Division

Does any of the box revenues flow through your P&L?

Thomas S. Rogers

We're paid a monthly recurring sub fee and to the extent those sub fees exceed the minimums, those...

Naveen Chopra

With respect to the hardware, the answer is no. If your question was about the hardware, the answer is no.

Todd T. Mitchell - Brean Murray, Carret & Co., LLC, Research Division

Okay. And my second question is in terms of the whole home solution, can you talk to me briefly about how the deployment of the thin client boxes impacts the overall sub number and the ARPU for that customer?

Derrick Nueman

So Todd, when we deploy a whole home solution with let's say RCN, each thin client will count as a subscription. Obviously, there are different ARPU elements as it relates to a thin client versus a DVR in certain deals and sometimes we price it per household. So obviously, as these start to impact the number, we'll update you guys on this stuff.

Todd T. Mitchell - Brean Murray, Carret & Co., LLC, Research Division

Okay. But there's a -- so it's going to add subscribers but there's a potential that the ARPU was slightly smaller than if it was just a single deployment in that household on a per box basis?

Derrick Nueman

Well, if it's per box, yes, the thin client has a less ARPU per box but the home gets more.

Operator

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

Michael Cohen

Congratulations on the subscriber growth. It appears that Judge David Folsom is going to be retiring on March 17, 2012, in the Eastern District of Texas. I was wondering how you think that might be affecting the timing of the Verizon case?

Thomas S. Rogers

Matt, do you want to take that?

Matthew Zinn

Yes. Well, it's like we said earlier in the call, there is a status conference in early January. We'll see where we are at that point. If Judge Folsom retires before hearing that case, then obviously that case will be transferred to another judge in the district and obviously, there would be some delay. It really depends on who it gets transferred to and what case load of that judge is. So there's just not that much we can say beyond. We're pressing forward with it as best we can.

Michael Cohen

Okay. And this is more of a curiosity, I was wondering how Suddenlink's TiVo deployment rollout is going in the Eastern District of Texas?

Thomas S. Rogers

Suddenlink is very happy so far with its deployments.

Michael Cohen

Okay. In terms of numbers and penetration?

Thomas S. Rogers

We don't release the numbers for the underlying MSOs. The numbers you've heard us quote here have come from their announcements and previous earnings and other releases, but we can't do that ahead of them.

Operator

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

Richard Tullo - Albert Fried & Company, LLC, Research Division

Question for Anna. In regards to Thailand, you said the impact was going to be roughly $1 million for the quarter. Is that going to be due to the availability of boxes limiting sales or increased pricing of DVD drives? And how do you think over the course of the next year what has happened in Thailand is going to influence the drive market?

Anna Brunelle

Yes, absolutely. The $1 million that we referred does refer to pricing. We've been successful to date in receiving the shares that we needed where -- as the allotments have been offered from our suppliers. We don't have any reason to think that we won't be able to receive those going forward. But that being said, it's a very fluid situation. Pricing could change. Supply could change over the next several months. I'm sure you've heard comments from other companies on this topic, and so we're watching it literally daily and trying to ensure that we keep getting the allocations we need.

Thomas S. Rogers

One thing to keep in mind here is, particularly when it comes to our overseas partnerships like Virgin who are rolling out TiVo, rolling out the TiVo experience, it's based on TiVo software being built into third-party boxes where the operators are contracted directly with another box provider operators, like Virgin have indicated. But they're on top of the situation so -- but that isn't a function of our supply of hard drives.

Richard Tullo - Albert Fried & Company, LLC, Research Division

Okay. And just on NOL, what was the NOL at the end of the quarter?

Derrick Nueman

Rich, we haven't said anything since our first quarter call where we said we'd exit the year with something a little south of $0.5 billion.

Richard Tullo - Albert Fried & Company, LLC, Research Division

And could you provide a little color on the advertising business? What does the product look like and in regards to the rollouts and just provide a little extra color? Because this seems like it's a significant opportunity, and Charter talks about business services as a market opportunity. How should we be thinking about advertising?

Thomas S. Rogers

Well, in broad strokes and to get a real sense of it, Derrick could give you a demo of what it looks like. But in broad strokes, having become well known in the advertising industry originally for the guys who made it possible to allow people to avoid commercials, a number of years ago, we came back in and said we could see DVRs proliferating and there was going to be this issue that the industry was facing. And we decided we would have an answer to that, which was to develop forms of inventory that caught eyeballs in a way that made it possible for advertisers to reach them even if they were fast forwarding through commercials. Various forms of inventory that range from the TiVo Home, TiVo Central, to when you pause a show and inventory comes up, it's not interrupting you because the show is paused, to at the end of the program when you're asked do you want to delete or save a program, something coming up then, meaning various ways other than interrupting a viewer during the middle of a program to have some way for an advertising impression to come through. Advertisers have embraced that because they know that they got 40% of homes with DVR technology and getting a way to market to those homes is critical. We have maintained that business as an important element of our relationship with the media industry, and we've continued to innovate there because as our operator deals roll out and the interface of TiVo, which has these added applications in them becomes, wider and wider distributed, that ad opportunity gets bigger and bigger. And what we were simply doing today is dimensionalizing some, just how many impressions do come from the base we have today. Obviously, with these operator deals, that base can be much bigger and the impressions that flow from it much larger.

Richard Tullo - Albert Fried & Company, LLC, Research Division

Okay. One completely self-indulgent question. When is the Comcast deal going to be available in New Jersey?

Thomas S. Rogers

Comcast is going to be rolling out in a number of markets, but all they've allowed to announce in terms of order of markets will be -- is San Francisco, which will be the first market to roll. So stay tuned. There will be more news on that front.

Operator

We have reached the allotted time for questions. Mr. Tom Rogers, are there any closing remarks, sir?

Thomas S. Rogers

Thanks, everybody, for joining us. Obviously, the sub trajectory that we have going now and the raves from operators and the announcements of launches that will be forthcoming, I think shows everybody that there's some real momentum here for us on the subscriber front. And our financials came in, in a way that I think everybody can see that the financial model is beginning to come into full shape, and as we've indicated, that will continue through next year. We'll have more updates for you as we go, and in the meantime, everybody have a great Thanksgiving and we will talk to you soon. Thanks again.

Operator

This concludes today's conference call. You may now disconnect.

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