TiVo F3Q07 (Qtr End 10/31/07) Earnings Call Transcript

| About: TiVo Inc. (TIVO)


F3Q07 Earnings Call

November 28, 2007 5:00 pm ET


Derrick Nueman - Director, Investor Relations

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

Cal R. Hoagland - Interim Chief Financial Officer

Matthew Zinn - General Counsel


Tony Wibel - Citigroup

Ingrid Ebeling - JMP Securities

Mike Olson - Piper Jaffray

Dan Ernst - Hudson Square Research

Todd Mitchell - Kaufman Brothers

Kunal Madhukar - Bear Stearns

Lee Westerfield - BMO Capital Markets

Barton Crockett - J.P. Morgan

Alan Gould - Natexis Bleichroeder


Welcome to the TiVo fiscal Q3 2008 earnings conference call.Today’s conference is being recorded. Now at this time I would like to turn theconference over to the director of investor relations, Derrick Nueman. Mr.Nueman, please go ahead.

Derrick Nueman

Thank you and good afternoon. I’m Derrick Nueman, TiVo'shead of investor relations. With me today are Tom Rogers, CEO; Cal Hoagland,Interim CFO. We are here to discuss TiVo's financial results for the periodending October 31, 2007, which is our third quarter of fiscal year 2008.

About 30 minutes ago we distributed a press release and 8-Kdetailing our financial results. We have also released a financial and keymetric summary which is posted on our investor relations website. Additionally,within a few hours we will release a recording of this call that you can accessthrough our investor relations section of our website.

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

Before we begin, I would like to note that our discussiontoday will include forward-looking statements within the meaning of the PrivateSecurities Litigation Reform Act of 1995 that relate to TiVo's futureprofitability and financial guidance, TiVo's ability to get closer to adjustedEBITDA break-even for fiscal year 2008, distribution of the TiVo service withComcast, Cablevision Mexico, Nero, Windstream, and in Canada, growth andinnovation in TiVo's advertising and audience research measurement business,growth in TiVo's broadband offerings, future availability of a two-wayfunctional standalone DVR model and PC software solution, the outcome of ourlitigation with EchoStar, and financial performance.

You can identify these statements by the use of terminologysuch as “guidance”, "believe," "expect," "will,"or similar forward-looking terms. We caution you not to put undue reliance on theseforward-looking statements, as they involve risks and uncertainties that maycause actual results to vary materially from forward-looking statements.

Factors that may cause actual results to differ materiallyinclude delays in development, competitive service offerings and lack of marketacceptance, as well as the other potential factors described under "RiskFactors" in the company's public reports filed with the Securities andExchange Commission, including the company's annual report on Form 10-K for thefiscal year ended January 31, 2007 and subsequent reports filed with the SEC.

I would also like to note that any forward-lookingstatements made on this call reflect analysis as of today and that we have noplans or obligations to update them. Additionally, some of the metrics andfinancial information provided in today’s call include non-GAAP measures.Please see our third quarter fiscal ’08 key metric trend sheet for areconciliation of these items.

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

Thomas S. Rogers

Thanks very much. Good afternoon, everyone. This was a solidquarter for TiVo as we continue to improve our financial profile, posting asubstantially better-than-guided adjusted EBITDA of $0.3 million. Even whentaking into account last quarter’s $11.2 million inventory write-down, adjustedEBITDA for the first nine months of the year was only a loss of $4.2 million.We are pleased with these results as we continue to make tremendous progresstoward our objective of getting closer to adjusted EBITDA break-even for fiscalyear 2008.

When including our fourth quarter adjusted EBITDA guidanceof a $2 million to $5 million loss, we believe we are definitely on trackversus last year’s adjusted EBITDA loss of about $30 million.

Service and technology revenues also came in above ourexpectations of $58.3 million.

These financial results validate our approach that focuseson driving the new emerging growth opportunities for our business in a way thatis also intended to make sure the standalone business is not perceived as adrain on our upside potential. These emerging growth opportunities include ourmass distribution strategy, the many exciting international opportunities wehave in front of us, unique ways we are supporting the advertising industry,the development of our audience research business, and what we believe will beour ability to increasingly leverage our intellectual property.

Let me take a few moments to discuss these opportunities.First, on the mass distribution front, our service on Comcast is now availablein some non-employee subscriber homes and full marketing efforts will beginshortly. We are very excited by the emphasis that Comcast has placed on thisproduct within its organization and their plans to aggressively market it at a $2.95up-charge, as well as through packaged bundles and win-back offers.

Further, we are pleased with Comcast’s plans to promoteTiVo, which will leverage many of their marketing assets, includingcross-channel TV advertising.

Also in distribution, we are enthusiastic about anotheropportunity we recently announced -- our partnership with Windstreamcommunications, a telephone company with over 3 million subscribers to marketTiVo as part of a bundled wireline service offering.

We also just announced a deal with Nero to develop asoftware solution that will bring the TV TiVo experience to users receivingtheir television signals through a computer. This deal provides us with anotheropportunity to deliver our unique user interface and differentiated feature setglobally, as it addresses the estimated 50 million PC tuners expected to sellworldwide by 2011, most of which are expected to be purchased outside of theUnited States.

With this new agreement with Nero, TiVo will be making thebest way to watch television available through all avenues of massdistribution, from various consumer electronics to cable and satellite boxes,and soon to the PC user.

In terms of international distribution, our presence issteadily gaining traction with our recent announcement that TiVo is nowavailable in Canada, where it is being sold in major retailers such as BestBuy, The Brick, London Drugs, and Futureshop. In addition, we announced thisquarter that the major cable operator in Mexico City, Cablevision Mexico, beganrolling out the TiVo service. We now have most of North America covered and inboth of these deals, we are operating on a far more efficient marketing basisthan our U.S. standalone business.

In Mexico, Cablevision is shouldering the subscriptionacquisition costs and giving us recurring sub fees, while in Canada there arelower hardware subsidies and our distributors are covering more of the retailrelated expenses we shoulder in the U.S.

International is an important piece of our business goingforward and what we are increasingly seeing is that international distributorsas they turn to the U.S. for guidance are very focused on DVR technology andTiVo is seen as the only brand name and the only player capable of developingsought after features, such as combining existing television with broadbanddelivery, unique ad solutions, and an easy user interface.

In our advertising business, we continue to make progress,though we fully understand that for the purposes of mass advertising, oursubscription base is still relatively small and we’ll see more significantresults as our subscription base grows. That said, we know the advertisingworld will soon face an enormous strategic challenge as DVRs will likely be in 30million homes within the next 12 months, adding considerably to the amount ofcommercial skipping that is already taking place.

As you know, we have done two things to come up with asolution to this major strategic challenge that the advertising industry faces.First, we have developed an audience research measurement tool which providesadvertisers second-by-second data of commercial watching patterns and second,we have come up with very unique ad solutions with new kinds of ad inventory sothat advertisers can better capture and reach those viewers who are actuallyfast-forwarding through ads.

As to the audience research business, we recently announcedthree significant deals. First and very importantly, we entered into asignificant relationship with NBC, making it the first television network tosign on for TiVo advertising and research solutions.

In 18 months, we’ve gone from pariah to network partner, agrowing indication of TiVo's importance to all sides of the media industry andthis clearly underscores the tremendous value that TiVo is bringing to majortelevision industry participants to solve the significant strategic challengesthey are now facing in the age of the DVR.

Through this relationship, NBC can provide their advertiserswith access to certain TiVo interactive advertising solutions, capabilitieswhich include interactive advertising tags to target fast-forwarding viewers.

NBC also entered into a subscription for our Stop||Watchaudience research service which provides insight into the viewership patternsof DVR homes, analysis only available through TiVo.

Secondly on this front, we completed a deal with Starcom,which is the first media agency to sign up for our Power||Watch consumer panel,a new research offering providing advertisers access to demographic data for20,000 households who opt in to our consumer panel. This significantlystrengthens our research offering even beyond the detailed second-by-seconddata we already offer and providers marketers with indispensable information sothey can make better buying decisions.

And thirdly, we announced a deal with Carat, one of thelargest media buying shops and among the fastest growing marketingcommunications groups in the world, to provide their clients with access to ourStop||Watch and Power||Watch services. These deals bolster our audienceresearch and measurement business’ long-term financial potential, as each newdeal provides high incremental margins.

In terms of our hard work to protect our intellectualcapital, our pending EchoStar litigation is progressing well and we expect itwill be resolved in the near future. As you know, we recently presented oralarguments in the court of appeals, which we believe went very well.

We remain confident that the district court’s judgment inour favor was correct and that our arguments have been well-presented onappeal. We are obviously paying very careful attention to this as a positiveoutcome has the potential to change our business in many ways.

Now, on to the standalone front; as I mentioned earlier,this quarter continued to be about driving our standalone business forwardwithout allowing it to cloud the perception of progress we are making on theother emerging parts of the business I just described.

Importantly, we continue to drive efficiency in ourstandalone business as we keep a sharp eye on its impact on our adjustedEBITDA. To that point, we launched TiVo HD with no hardware subsidy in thedirect channel, allowing us to reduce the overall level of resources directed towardsthe standalone business.

Also recently, we made a major announcement within the NCTA,the National Cable Television Association, where we have significantlystrengthened our relationship with the cable industry in two very meaningfulways related to our standalone business. First, we have entered into anagreement with cable labs and the cable industry that will ensure TiVo HDstandalone box users can access and enjoy the multitude of programming thatwill be delivered through new switch digital video technology. Second, thecable industry has agreed as part of the switch digital solution to be directlyinvolved with the TiVo installation process so that TiVo users have an easy andsatisfying installation process.

By having the cable installer involved to ensure the set-upprocess is successful, we believe both TiVo and cable operators will benefit byhaving increased subscriber good will.

In addition, as a result of our constructive conversations,TiVo and the cable industry have come to an agreement on a blueprint for astandalone TiVo box that will have full two-way cable service functionality.

While the technical specifications will still need to beworked out, such a set-top box will mean TiVo subscribers will be able to getfull access to cable VOD and other two-way cable services. This could also meanthat a standalone TiVo box could fully substitute for a cable operator set-top.

This understanding was recently communicated to the FCCthrough an ex-party filing we made yesterday. We believe that this dialog withthe cable industry has been very constructive and demonstrates the cableindustry’s genuine desire to work with TiVo, not to mention the clearrecognition that TiVo is a very important offering for cable subscribers.

With all that said, we are looking to improve our marketingapproach for standalone TiVos in a few key areas.

First, better educating consumers on the many differentiatedfeatures that TiVo offers and second, making it clear to consumers that TiVodoes in fact offer pricing value relative to other DVR alternatives.

Let me review how we are working to better address each ofthese. First, our offer -- excuse me, first our efforts to differentiate TiVofrom generic DVR alternatives continue to gain traction, especially when itcomes to making broadband content available directly on the television. Webelieve that just as the music world quickly became on-demand a la carte, thetelevision industry will follow that same path by providing broadband videostraight to the television and viewers will consumer increasing amounts oftheir programming on an on-demand, a la carte basis.

Importantly, because user interface, search and advertisingwill be the critical underpinnings of any broadband video offering, and becausewe have pioneered the only comprehensive solution to those elements, we believethat we are very well-positioned to be the leaders in offering the best a lacarte on-demand consumer experience.

Our offering of more than 15,000 titles that are nowavailable for TiVo users through Amazon Unbox and the more than 4 million songsavailable to TiVo subscribers through Rhapsody are a strong beginning in ourefforts for TiVo to deliver any content you want to get on your television set.

Significantly, we are finding that TiVo's broadband contentofferings have strengthened our relationship with our subscribers that usethese features as churn is significantly less for broadband connected users.Additionally, over the last year there have been more than 12 million downloadsof our TiVo cast content.

Second, in terms of pricing, we know from our marketingresearch that the biggest issue we have with potential subscribers is theperception that TiVo is priced well above where it actually is. Well, the factof the matter is you can get a TiVo plan for as cheap as $8 a month, which ischeaper than many generic DVR monthly charges. In addition, by removing yourcable set-top box and using TiVo as your universal cable box instead, consumerscan further lower their cable bill.

While the TiVo HD box sells at $299, which retailersconsider the consumer sweet spot for being a strong companion sale with an HDtelevision set, it is still a considerably higher price than the products weoffered previously, especially last fourth quarter when there was no up-frontcharge for the TiVo box. Thus, we know full well we must be more effective incommunicating the price benefits that TiVo offers relative to the alternatives.

In conclusion, we are confident that the solid foundation wehave laid thus far will serve us well as we continue to take advantage of thegrowth opportunities in the newer elements of our business and as we continueto drive our standalone business forward. We also believe that we are doing theright things to solve the marketing challenges that I just described.

All of this is coming together nicely to position us wellfor the fourth quarter and beyond.

With that, I will turn it over to Cal. Cal.

Cal R. Hoagland

Thanks, Tom and good afternoon, everybody. As Tom mentioned,we are pleased with our financial performance this past quarter and pleasedwith the progress we’ve made. I will now provide some additional highlightsabout our most recent fiscal third quarter operating results.

Service and technology revenues were $58.3 million, an 11%increase compared to last year’s third fiscal quarter. We sawbetter-than-expected technology revenue, primarily due to new development workwe did for Comcast.

Service revenues were $52.9 million, up 8% for the thirdquarter year over year. This was primarily driven by an increase in net TiVoowned subscriptions and increased revenue from new subscriptions in our TiVoowned base over the course of the last year. These gains were offset bycontinued decreases in our DIRECTV sub-base.

Technology revenues were $5.3 million, up $1.8 million fromthe year-ago third fiscal quarter. Again, technology revenues were strongerthan we anticipated primarily due to new development work we did for Comcast.

Excluding expenses related to stock-based compensation, costof service and technology revenues were $14.7 million for the quarter, whichconsisted of $10.6 million related to service revenues. The service grossmargin excluding stock-based compensation was 80%. This was slightly higherthan the comparable year-ago quarter.

Looking at hardware, our gross loss was $11.9 million. Thisconsists of hardware revenue related costs, which include expenses related torebates, revenue share, inventory reserves, and other expenses associated withour retail channel. Contributing to gross hardware loss was $7.8 millionrelated to hardware sold and $4.1 million related to rebates, revenue share andother expenses associated with our retail channel.

Operating expenses excluding stock-based compensation as apercentage of service and technology revenues were as follows: sales andmarketing was 25%, which is flat sequentially but up on a year-over-year basisdue to higher marketing. The portion of sales and marketing expenses related tosubscription acquisition costs represented 15% of revenue. Research anddevelopment was 21%, and G&A was 12%. G&A expenses were down byapproximately $1 million compared to the third fiscal quarter last year andthis was primarily due to lower costs associated with the EchoStar litigation.

With the aggregate stock-based compensation expenses of $7.3million, net loss was $8.2 million, including interest income of $1.2 million.This compares to our net income guidance of a loss of $14 million to $17million. Our net loss per share was $0.08 per share for the third quarter ofthis fiscal year and that compares to a net loss per share of $0.12 for thethird quarter of last fiscal year. Our net loss per share calculation for thethird quarter of this fiscal year was based on $97.6 million weighted averageshares.

Our adjusted EBITDA for the third quarter of this fiscalyear was $300,000. This compares to adjusted EBITDA loss of $6 million for thethird quarter a year ago and to our adjusted EBITDA guidance of a loss of $5million to $8 million. In addition to stock-based compensation and interestincome of $1.2 million, our adjusted EBITDA calculation also adjusts for $2.4million of depreciation and amortization in the quarter.

The better-than-anticipated net loss and adjusted EBITDA wasdriven by lower-than-expected operating expenses, primarily due to lessmarketing and legal fees. Additionally, note, that both our third quarter netloss and adjusted EBITDA included the benefit from utilization of about$700,000 of the inventory reserve. We expect some future benefit in Q4 and ourinventory reserve for the standard definition product currently stands at $10.5million.

Finally, we ended the quarter with about $82.5 million ofcombined cash. That is cash plus cash equivalents plus short-term investments.The sequential decrease in combined cash was primarily caused by purchasinginventory and stocking the retail channel ahead of the holiday sales.

As is typical, we anticipate that our cash position willincrease in the fourth quarter as we receive payments from retailers and directcustomers.

Turning over to our key pricing and volume metrics, our TiVoowned gross additions were 69,000, in line with expectations. We saw a 68%sequential increase in gross adds, driven by seasonality, the launch of our newHD box, and slightly better-than-anticipated standard definition activations.

Gross adds decreased 32% compared to the year-ago thirdfiscal quarter. Churn was 1.3% per month, slightly up from our second fiscalquarter this year and up relative to the third fiscal quarter a year ago. Thisis a result of fully amortized lifetime subs and as our churn was impacted bythe fact our HD solution is available for cable subs and not satellite subs.

On a net basis, our TiVo owned subscriptions increased by4,000 in the quarter. Our TiVo owned subscription base now stands atapproximately 1.7 million, which is up 87,000 from a year ago. Additionally,our DIRECTV sub base declined by 134,000 sequentially. Our overall sub base nowstands at approximately 4.1 million subs. Note that this quarter and goingforward, we will classify the DIRECTV subs as part of a broader MSO broadcastercategory. This will now also include future subs from Cablevision, Comcast,Cox, as well as other non-TiVo owned customer relationships.

For the third quarter, our TiVo owned average revenue peruser was approximately $9. The average monthly price paid by a new TiVo ownedsubscription remained at solid levels well above our average ARPU of $9.Despite the higher levels of new subs coming in, we saw a slight sequentialARPU decrease from lifetime users that had become fully amortized.

In addition, we saw a number of our existing subs convertingto longer term contracts with lower monthly ARPUs. As we discussed lastquarter, these fully amortized lifetime users do not contribute to subscriptionrevenue but remain in our subscription base, negatively impacting our ARPUcalculation.

At the end of the quarter, we had approximately 190,000cumulative active lifetime subscribers that had reached the end of their48-month amortization period that we use to recognize lifetime revenue. Thisrepresents 28% of our current total lifetime subscription base, which stands at687,000 subscriptions.

Getting into subscription acquisition costs, our totalacquisition costs were $20.9 million, and that compares to $23.5 million in thethird quarter of last year. Our SAC in the third quarter of this year was about$300 and that compares to SAC of about $230 in the year-ago last third quarter.The increase on a year-over-year basis is due to the increased marketingactivities and lower gross adds. Looking to the fourth quarter, we anticipatethat SAC will decrease as we benefit from seasonal increases in gross adds andas we have slightly less marketing expense.

Now, turning to guidance for the fourth quarter, we expectservice and technology revenues of between $58 million and $60 million. Ofthis, we anticipate service revenues will benefit from sequential increases inTiVo owned subs, as well as from the recognition of approximately $1 million inDIRECTV deferred revenue. We also anticipate technology revenues to be slightlyincreased compared to the third quarter of this year.

We currently expected our fourth fiscal quarter adjustedEBITDA results to be in a range of a loss of $2 million to $5 million, and thatcompares to adjusted EBITDA loss of $15 million in the fourth quarter of lastyear. We expect that net loss to be in the range of $9 million to $12 million,and that compares to a net loss of about $20 million in the fourth quarter oflast year. The anticipated year-over-year improvement in adjusted EBITDA andnet loss is primarily due to lower hardware subsidy and lower rebate expensesexpected in the fourth fiscal quarter.

As you can see, we are on pace to make a suitableimprovement to adjusted EBITDA in this fiscal year compared to last fiscalyear’s adjusted EBITDA loss of about $30 million. Our adjusted EBITDAimprovement through the first nine months of this year compared to last yearwas significant, such that when you even consider the net inventory charge of$10.5 million, our adjusted EBITDA loss is only $4.2 million. When including afourth quarter guidance of fiscal 2008, our adjusted EBITDA is on track to be aloss of approximately $6.2 million to $9.2 million, which again includes theimpact of the $10.5 million net inventory related charges.

To wrap up, I’m encouraged about the progress we’ve madethis past quarter. First, we made tremendous progress on the emerging growth areasof our business. Comcast is close to fully marketing our product and ouradvertising and research business continues to gain traction. Our intellectualproperty is another step closer to being validated. We anticipate that theseopportunities will provide us a high margin revenue stream for years to come.

Second, the financial profile of our standalone businesscontinues to improve as we shift away from extensive hardware subsidies. Thishas allowed us to improve our adjusted EBITDA performance while continuing todevelop this business further without undermining our emerging growthopportunities.

This concludes my remarks. We’d like to thank you for yourtime and we’d now like to take questions.



(Operator Instructions) Our first question will come fromTony Wibel with Citigroup.

Tony Wibel -Citigroup

I was hoping to start off by just focusing real quickly onthe lifetime subscribers. I think this quarter you had a promotion to transfersome of the standard definition boxes over to the high definition. What was theuptake on that? And do you see potential to increase the adoption of thatprogram?

Thomas S. Rogers

Yeah, we believe our existing base is a major leadingindicator for new products and we like to make sure that we get them in ourenthusiast home so the buzz can get out through them. We saw an uptake in ourmulti-set discount offer, which is available for people who have more than oneTiVo in the home and that was one way to indicate how the existing base istaking on a new product.

We did see some lifetime take-up that’s been instituted justvery recently in terms of existing subs being able to make that available togive to new subs, which we are hoping to broaden the availability on apromotional basis to our existing subs to be able to offer that to new peoplethey want to bring into the family.

And in terms of the upgrade that you are pointing to, yes,we saw some decent results on that. I think that we overall feel that there aremany different ways to market to the existing base and we not only want that toapply to new hardware offerings but new feature offerings and how we market tothe existing base our content offerings in particular, to get the buzz going onthat is something we’re very focused on.

Tony Wibel -Citigroup

Is there anything else specifically that you could do tohelp reduce some of the churn in the standalone channel?

Thomas S. Rogers

Well, I think -- remember part of that churn is lifetimesubs that haven’t necessarily been connected and are passed the amortizationperiod and that’s a different kettle of fish in terms of how to reach them andbring them back into the fold.

But we are seeing, as I mentioned in my remarks, asubstantial reduction in churn from broadband connected users and we do believethat the more people that are broadband connected and the more who areappreciating the availability of content there, we are clearly seeing arelationship between that crowd and reduced churn. We know we have a lot ofwork to do on getting the content availability out there more broadly,understood more broadly, I should say, and the more progress we make on thatfront the more churn reduction I think we’ll see.

Operator, we’re hearing clicks on the phone. If there isanything that can be done about that.


All right. Again, that’s simply just coming from Tony’sline.

Tony Wibel -Citigroup

Thanks, Tom. That was all I had.


And we’ll next go to Ingrid Ebeling with JMP Securities.

Ingrid Ebeling - JMPSecurities

-- correct, for the Comcast subscribers?

Derrick Nueman

Ingrid, this is Derrick. Could you start the question overagain?

Ingrid Ebeling - JMPSecurities

You said on the call I believe that the up charge for theComcast customers with TiVo is going to be $2.95 a month.

Thomas S. Rogers


Ingrid Ebeling - JMPSecurities

And will the economics be similar to those of DIRECTV foryou?

Thomas S. Rogers

I would say roughly that’s a decent guidepost for how theeconomics with Comcast work. We’ve never release specifically what those subfees look like but that is one way to assess the value to us.

Ingrid Ebeling - JMPSecurities

Okay, and it sounds like you are not going to be disclosinghow many Comcast subscribers you get with the one MSO customer line you aregoing to have, but I was wondering if you could give us a little bit of flavoron how many people have signed up for the e-mail notifications in the Bostonarea to let them know when the TiVo Comcast is going to be available?

Thomas S. Rogers

Well, Comcast has provided a way for people to sign uponline and tell them that they are ready for the product here and we’veactually had not only a lot of people, and Comcast hasn’t made those numbersavailable so we’re not going to make them available. But it’s interesting tonote that a lot of people beyond the New England area where this is being madeavailable have also gone online to say hey, we want it and we’re ready, sowe’re glad to know there are people around the country waiting for this.

The important thing here is that Comcast is really lined upto go with television inventory devoted to this and all kinds of marketingapparatus, not to mention having trained their CSR and marketing people tobegin to support a full marketing launch and when the infrastructure stabilitytesting, which is really the last piece of this that they are being cautiousabout, there are so many pockets throughout New England of a market of 4million people over their largest market. And it’s not related to software, notrelated to middleware but the interaction of their network infrastructure withboxes and want to make sure that all the pockets are stable and ready to gobefore they really light up the marketing behind this. That’s the last piece thatis coming into line and we expect that all to be lit up in terms of themarketing very shortly.

Ingrid Ebeling - JMPSecurities

Okay, great. And do you have a sense of what the timeframewill be to go to another market once Boston gets lit up?

Thomas S. Rogers

No, I think obviously Boston being their biggest market istaking on a big one right from the start, which we’re glad to see and I thinkthat as soon as they have a clear idea of what marketing formulations work andwhat’s the best way to take those marketing formulations into other markets, wewill begin to see things roll more broadly.

Ingrid Ebeling - JMPSecurities

Okay, great. Thanks a lot and congratulations.

Thomas S. Rogers

Operator, we’re still hearing beeps on the phone quite regularly.


I’m going to get that taken care of. I thought it was --okay, we’ll next to go Mike Olson and I’ll get that corrected.

Mike Olson - PiperJaffray

All right, thanks, guys. Basically, if you look at thetechnology revenue, and you said it’s going to be up quarter over quarter. Isthat just a continuation of development revenue with Comcast and is there thepotential that this is going to fall off then in Q1? Or what are yourexpectations? I guess basically, will this continue to be a fairlyunpredictable line item or are we going to be at a new plateau where we cangrow slowly from there?

Thomas S. Rogers

Well, to some extent there’s a lack of predictability in itbut we do see that line item grow beyond Comcast as there are other R&D effortsinvolving the payment of technology revenues beyond Comcast and those begin toroll in and grow going forward as well. So it’s something that we are trying toseparate out and give a clear view on and when we have predictability to beable to offer you to give you a clear view of what’s service revenues andwhat’s technology revenue going forward.

Mike Olson - PiperJaffray

Okay, that’s helpful. And then, are you willing to give us aballpark of kind of what the revenue from the audience measurement business isat this point?

Thomas S. Rogers

What the what revenue is?

Mike Olson - PiperJaffray

The audience measurement business.

Thomas S. Rogers

No, we have not broken that out, nor have we broken out thead solutions business revenue. Our goal here with the audience researchbusiness is to get as much of the industry signed up as we can using the data,dependent on the data. We feel pretty good about the initial pricing that we’vebeen able to secure. Obviously as people get more involved and more dependent,not only with what’s going on with DVR, television consumption but also moreinvolved with their own modeling being dependent on the granular data that weprovide, we believe the value to them and the pricing related to it will grow.But that’s not something that we’re providing at this point.

Mike Olson - PiperJaffray

Okay, and then just one last question; I do want to just askabout the Comcast rollout and I know it’s not going to matter in the long-termwhether TiVo and Comcast is out now or in two months or whatever, but we’vespoken with some Comcast people in New England. I’m sure there are others onthe call that have done the same thing and they keep reiterating that it’s notgenerally available. Would you say that the current number of users is fairlyimmaterial based on that? And if so, will it be in the next quarter that thisbecomes more material do you think?

Thomas S. Rogers

Well, they have been making available on a very limitedbasis the non-Comcast employees, real subscribers, real homes, but they haven’tmade any secret, nor have we, about the fact that marketing hasn’t lit up andthey are not making it widely available until it does. As I said, we think thatwill occur shortly and your question really goes not to when it will beavailable but what the growth trajectory will be once it is, and we -- I don’twant to give you a period of time there that we think things will be material.Certainly the marketing formulations has to play out and which ones work bestversus others and which kinds of ads to which kind of customers work bestversus others. But we consider this to be a very significant element of ourgrowth potential going forward, not only with Comcast but later with Cox andwith that, we consider that to be the key means for our overall sub growth intime increasing.

Mike Olson - PiperJaffray

Okay. Thanks a lot.


Our next question is from Dan Ernst with Hudson SquareResearch.

Dan Ernst - HudsonSquare Research

Yes, good evening. Thanks for taking the call. Two, if Imight; first on Comcast, could you give us a little more color on what thehold-up has been? Is there ongoing technical issues with download? Is there anopportunity to have it pre-installed in the box? And then related to that,given how long this has taken to roll out, is there any risk that this is notgoing to roll out to more markets over the next year?

And then my second question on the ad business, audienceresearch, that bump of additional revenue potential stream, did that revenue youhave, those contracts you have, scale as your mass distribution takes off, asyour subscriber base starts to grow again? Thanks.

Thomas S. Rogers

I’m sorry, which revenue begins to take off?

Dan Ernst - HudsonSquare Research

If I lump advertising, audience research, tagging,everything that you do around selling additional features to parties outside ofconsumers and the cable MSOs.

Thomas S. Rogers

Okay, well, on the latter question, advertising certainlybenefits substantially by increased number of subs. That’s certainly the singlebiggest factor we have now in terms of growing that. We have a lot of agencies,a lot of advertisers that enter into deals with us, but the sub base being whatit is is the biggest inhibiting factor on the growth of ad sales.

I will say there are an increasing number of advertisersthat are looking at our sub base and saying there may be 20 million DVR homestoday. In the next year, there may be 30 or 35 million. This is beginning to bean issue that is so overwhelming that we have to have an answer to how we aregoing to market into television homes with that many homes that are watchingtelevision this way. And we are the only game in town when it comes toDVR-based ad solutions, so the growth of our sub base aside, we become acritical way for people to learn how to get into those homes where commercialsare not being seen in the traditional way.

The ARM business, the research business, is not dependent onsub growth or -- obviously it will benefit by the size and scale of TiVo andthe proportion of DVR homes that we represent. But the sample size that we areable to pull from our 4 million or so subs relative to what is otherwiseavailable by way of research about DVR audience patterns, we have a much largersample size to offer all kinds of marketers. And the scale there is roughly wehave 20,000 homes on a regular basis in our audience research sample andNielsen by comparison I believe has in its people meter sample something in theorder of a couple of thousand homes that are DVR households.

And so what we are finding is not only is the granularityand the detail and the analytics of what we provide unique but the base uponwhich it is drawn is more than substantial for the purposes people are lookingat now.

On your Comcast questions, the software, the middleware, theperformance of TiVo in households -- it works. It’s there. It’s happening, soit’s not an issue of whether this works. There is the distribution of it intohomes raises issues of the stability of the infrastructure. Anybody who knowsthe history of cable system acquisitions over the years, in many cases they aredifferent systems coming in from different previous owners and different levelsof development of infrastructure. And when you are dealing with a large marketthat has a major geographic area, there are obviously going to be pockets ofthat infrastructure that are different than others and it’s the overallstability of that as it relates to the interaction with the hardware andfirmware, not our software application, not the middleware that ties thesoftware application to the set-top.

And so as I’ve said, they’re coming around the corner on thefinal stages of that stability assessment. They’re feeling good about it.That’s why we say that things will be lit up slowly in a short period of timeand the issue of rolling additional markets from there, their expectation iscertainly that will occur within the timeframe that you mentioned. We knowunanticipated things can hit us along the way. We’ve been dealing with that inthis project, nothing that isn’t cutting edge technology where it doesn’tinvolve hitting certain unanticipated issues or risks. But based on what we’reseeing, both we and Comcast are feeling very good about the ability to get thisrolled out quickly.

Dan Ernst - HudsonSquare Research

Just to qualify that, earlier in the year, or maybe it waslate last year, the calls blur together, but you had made the comment at onepoint in time that you had expected by the end of this calendar year to see asubstantial number of markets, so even if we push that out one year, could youstill have that clarification for calendar year ’08, that we would be at asubstantial number of Comcast markets by end of calendar ’08?

Thomas S. Rogers

Well, the speed with which we roll out I think will be one,the function of this kind of infrastructure type issue going forward and thestability issues and making sure that other markets are fully prepared, andtwo, making sure the marketing formulations that we are going to be putting towork there, that Comcast is going to be putting to work in the New Englandarea, the sooner that we see those marketing formulations being the right ones,being able to move forward with rolling with other markets, so I don’t want toput myself in Comcast’s shoes on predictions there, but certainly our goal isto be multiple markets rolling over the course of the year and the sooner thatthose two items are able to be dealt with with confidence, you will see that.

Dan Ernst - HudsonSquare Research

Great, thanks.


Our next question then is Todd Mitchell of Kaufman Brothers.

Todd Mitchell -Kaufman Brothers

Thank you. I have a question about the agreement with thecable industry for them being involved in installation. Could you qualitativelyflush out what that means? Does this mean that they will be involved as areseller? Are they going to be carrying inventory? I mean, is there a truckroll involved in here and if so, how is that paid for? Also, is there some kindof mechanism for referrals in terms of the operating guys? I know the DBS guysget -- can get a splice for a referral on customer or an upgrade if they leavea tag at the house. And lastly, is this in principle meant for MSOs other thanthe Cox and Comcast where you have a downloadable offering? Or would this be inaddition to that for customers who basically wanted a standalone box instead ofthe downloaded offering?

Thomas S. Rogers

Good question. Let me clarify all that a little bit. First,this is not a reseller relationship at all and yes, it would apply to all cableoperators, even those that we have software development deals with because allof them would have standalone TiVo customers that use cable card technologybecause they want the advantages and the advanced features that come with aTiVo standalone box versus the version of TiVo that’s available through thesoftware upgrade.

The way this was intended to work is we sat down with thecable industry after we surfaced the issues of the cable card technology notbeing able to read switch digital signals, the switch digital transmissiontechnology being a new form of distribution, signal distribution that the cableindustry wanted to engage in, and said we’ve got to solve this issue and policymakers agreed this issue had to be solved, of cable card customers for our TiVoHD box not being in a position where transmissions made and switch digital werereadable by that card.

And that led to a couple of possibilities being on the tableand the one that we agreed on with the cable industry involved an adapterresolver gear. That will be a small device that will attach to the TiVo box tomake sure that the switch digital signals are available.

And we said in the course of this that having a cable cardand this device in the home, while many will be able to install it on theirown, we want to make sure that this is something that the cable subscriberfeels can be easily done and done by the cable operator, so when the cableoperator is there delivering a cable card, as they do today and now when thisdevice is saleable, delivering this device as well, that they will know thatthey aren’t going to be sitting there having to figure this out with the cableoperator. The cable installer will be able to install and figure this out forthem.

And to your question on charges, our anticipation is thatthe large cable operators are not going to charge customers for this additionaldevice or the installation of it. That’s all part of the cable industry lookingto make sure that after all, these are cable subscribers using cable cards whothey want to leave happy and not be disgruntled in any way and TiVo boxes arecertainly a way to hold on to those cable subscribers because they can enjoythe benefits of the TiVo service, so both cable and ourselves are incented tomake sure this is a happy experience.

Derrick Nueman

Next question.


It is from Kunal Madhukar with Bear Stearns.

Kunal Madhukar - BearStearns

Thanks for taking the question. Tom, you mentioned about thepotential IP opportunity. Given what Charlie Ergen said on the third quarterconference, on his third quarter conference call, and the development at thepatent office today, could you give us some more information or visibility onhow we should look at the process? And what exactly did the patent office saytoday?

Thomas S. Rogers

Well, we have Matt Zinn, our general counsel, on the phonewho can comment on the patent office matter. Matt.

Matthew Zinn

Today the patent office issued a notice that it hasterminated the reexamination of the time-warp patent. We have not received thisnotice yet so we don’t know exactly what it contains but we’re optimistic thatall of the time-warp patent claims have been affirmed without modification. Sowe will know more in the next couple of days.

Thomas S. Rogers

We haven’t seen anything yet though, so we can’t speak tothat definitively yet. I think the -- I’m sorry, the other part of yourquestion in terms of --

Kunal Madhukar - BearStearns

In light of Ergen’s comments, how could we get morevisibility into how the litigation will be resolved?

Thomas S. Rogers

Well, the litigation has been argued before the FederalCircuit Court of Appeals. It sits with them now for a decision. I took Charlie’scomments to mean that he recognizes the value of TiVo. I think that TiVo isrecognized as a gold standard there. I don’t have any comments to make beyondthat, other than the fact that we are -- we point with pleasure to the factthat EchoStar does recognize the value that TiVo offers.

Kunal Madhukar - BearStearns

And a quick follow-up; Matt, if the patent office affirmsall the claims without any modification, how does that impact the litigation?There was some discussion about hardware claims and software claims and some ofthe claims were valid and some were not. How would that change or would thatchange the litigation at all?

Matthew Zinn

I don’t think today’s action will affect the litigation oneway or the other way. In the past, the patent office has affirmed the so-calledsoftware claims, the majority of our claims in the patent and some of thoseclaims are at issue in the litigation so regardless of what the patent officedoes in this action, we don’t think it should impact the litigation.

Kunal Madhukar - BearStearns

Thank you.


We’ll next go then to Lee Westerfield with BMO Capital.

Lee Westerfield - BMOCapital Markets

It just got addressed relating to the patent reissuance.Thank you very much. That was clear.


Very good. We’ll next go then to Barton Crockett with J.P.Morgan.

Barton Crockett -J.P. Morgan

Okay, great. Thanks a lot. Two question, one a quickie, justa number; did you break out the rebate revenue and rev share number that waswithin that net hardware number that you guys disclosed?

Derrick Nueman

It was $4.1 million.

Barton Crockett -J.P. Morgan

I’m sorry, that was 4.1?

Derrick Nueman


Barton Crockett -J.P. Morgan

Okay, great. Thank you. Secondly, Tom, I was wondering ifyou could comment on if you are vindicated in this EchoStar appeal, eitherthrough a settlement or through a decision or both, what would that -- you saidthat this could have multiple benefits for you in your script. I was wonderingif you could elaborate -- how would this affect your ability to negotiate withthe rest of the industry and how generally would it affect your business?

Thomas S. Rogers

Well, we have been offering TiVo on the basis that we havean awful lot of value in the user interface in the area of search and the areaof various features, as well as ad solutions and audience research that gobeyond what our patent protection is but obviously, having a key patent likethis affirmed would add a clear strength to our overall negotiating position interms of distribution.

Our goal is to enter into commercial relationships thatvalue our innovative approach as well as our patents, and having a majorstatement on this on the patent front would certainly strengthen those overallpositions in the negotiating table. Beyond that, I don’t want to comment on anyspecifics but I think all recognize it would certainly strengthen our posturethere.

Barton Crockett -J.P. Morgan

Okay, and then just one final thing; could you update us onthe CFO search?

Thomas S. Rogers

Yeah, we are quite happy with our current financial teamhere. We think we are making good financial progress. We are doing a good jobof making sure we have the right controls and ability to assess our ongoingfinancial performance. Cal has stepped in and done a very good job on aninterim basis and [Brinel], who works with him, has done a great job on thecontroller and treasury front. We continue to have a search and are evaluatingcandidates on an ongoing basis but we don’t feel any particular urgency there,given the fact that the current team has gelled well.

Barton Crockett -J.P. Morgan

Does that suggest there’s a possibility you guys may nothire someone from the outside?

Thomas S. Rogers

Beyond what I just said, I really don’t think I haveanything further to offer, but our current situation is one I’m comfortablewith?

Barton Crockett -J.P. Morgan

Okay. All right, that’s great. Thank you very much.


We have time for one more question; Alan Gould with Natexis.

Alan Gould - NatexisBleichroeder

Thank you. Two things; just following up on Todd’s questionabout the cable boxes, how does that leave customers, existing customers whoalready have a TiVo box? Do they need an installation to be able to get switchdigital video?

My second question is I notice on your prepaid plans that onthe one-year plan, you dropped the price from $179 to $129. I was wondering howthat’s worked and if that’s substantially changed the mix of people taking oneyear versus two year versus three year?

Thomas S. Rogers

On the first question, the switch digital issue only appliesto people that have cable card boxes and those that do have cable card boxesalready installed, yes, would need this additional device that the cablecompany would provide and install.

Our overall blueprint here for installation work with thecable industry though again goes beyond this additional device. This is aboutmaking sure that the entirety of the TiVo installation process is done well,done properly, not in this way that leaves the consumer holding the bag butputs the cable installer in a position to make sure that this TiVo box with itscable card and new device dependencies is one that is put together well andsuccessfully for the subscriber.

On the second question you asked again was what?

Alan Gould - NatexisBleichroeder

The pricing change on the one-year.

Thomas S. Rogers

The pricing change on the one-year -- well, our -- weinstituted some promotional pricing for the holidays which included the offerthat you set forth. Part of that was made available, of course, the lastholiday we were basically offering boxes for free and needed to recoup theentirety of the hardware off the back of the service fee. As we’ve introducednew hardware and HD hardware where there’s no subsidy when we sell it directand a much smaller subsidy when sold at retail, it certainly gave us anopportunity to lower service fee pricing and to attempt lowering of service feepricing some for the holidays to see how that would affect sales.

I’d say we have seen some reduction in three-year plans,both monthly and up-front three-year plans but relative to the overall holidaysales, it’s really too early to assess what the full impact of that might be.

Alan Gould - NatexisBleichroeder

Okay. Thanks a lot, Tom.

Derrick Nueman

Thanks for joining us and we look forward to talking to youfurther.


And again, this does conclude today’s conference call. We dothank you for your participation.

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