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TiVo Inc. (NASDAQ:TIVO)

F3Q07 Earnings Call

November 28, 2007 5:00 pm ET

Executives

Derrick Nueman - Director, Investor Relations

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

Cal R. Hoagland - Interim Chief Financial Officer

Matthew Zinn - General Counsel

Analysts

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

Operator

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 the conference 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's head 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 period ending October 31, 2007, which is our third quarter of fiscal year 2008.

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

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

Before we begin, I would like to note that our discussion today will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that relate to TiVo's future profitability and financial guidance, TiVo's ability to get closer to adjusted EBITDA break-even for fiscal year 2008, distribution of the TiVo service with Comcast, Cablevision Mexico, Nero, Windstream, and in Canada, growth and innovation in TiVo's advertising and audience research measurement business, growth in TiVo's broadband offerings, future availability of a two-way functional standalone DVR model and PC software solution, the outcome of our litigation with EchoStar, and financial performance.

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

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

I would also like to note that any forward-looking statements made on this call reflect analysis as of today and that we have no plans or obligations to update them. Additionally, some of the metrics and financial information provided in today’s call include non-GAAP measures. Please see our third quarter fiscal ’08 key metric trend sheet for a reconciliation 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 solid quarter for TiVo as we continue to improve our financial profile, posting a substantially better-than-guided adjusted EBITDA of $0.3 million. Even when taking into account last quarter’s $11.2 million inventory write-down, adjusted EBITDA 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 progress toward our objective of getting closer to adjusted EBITDA break-even for fiscal year 2008.

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

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

These financial results validate our approach that focuses on driving the new emerging growth opportunities for our business in a way that is also intended to make sure the standalone business is not perceived as a drain on our upside potential. These emerging growth opportunities include our mass distribution strategy, the many exciting international opportunities we have in front of us, unique ways we are supporting the advertising industry, the development of our audience research business, and what we believe will be our 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 available in some non-employee subscriber homes and full marketing efforts will begin shortly. We are very excited by the emphasis that Comcast has placed on this product within its organization and their plans to aggressively market it at a $2.95 up-charge, as well as through packaged bundles and win-back offers.

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

Also in distribution, we are enthusiastic about another opportunity we recently announced -- our partnership with Windstream communications, a telephone company with over 3 million subscribers to market TiVo as part of a bundled wireline service offering.

We also just announced a deal with Nero to develop a software solution that will bring the TV TiVo experience to users receiving their television signals through a computer. This deal provides us with another opportunity to deliver our unique user interface and differentiated feature set globally, as it addresses the estimated 50 million PC tuners expected to sell worldwide by 2011, most of which are expected to be purchased outside of the United States.

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

In terms of international distribution, our presence is steadily gaining traction with our recent announcement that TiVo is now available in Canada, where it is being sold in major retailers such as Best Buy, The Brick, London Drugs, and Futureshop. In addition, we announced this quarter that the major cable operator in Mexico City, Cablevision Mexico, began rolling out the TiVo service. We now have most of North America covered and in both of these deals, we are operating on a far more efficient marketing basis than our U.S. standalone business.

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

International is an important piece of our business going forward and what we are increasingly seeing is that international distributors as they turn to the U.S. for guidance are very focused on DVR technology and TiVo is seen as the only brand name and the only player capable of developing sought after features, such as combining existing television with broadband delivery, 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, our subscription base is still relatively small and we’ll see more significant results as our subscription base grows. That said, we know the advertising world will soon face an enormous strategic challenge as DVRs will likely be in 30 million homes within the next 12 months, adding considerably to the amount of commercial skipping that is already taking place.

As you know, we have done two things to come up with a solution to this major strategic challenge that the advertising industry faces. First, we have developed an audience research measurement tool which provides advertisers 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 so that advertisers can better capture and reach those viewers who are actually fast-forwarding through ads.

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

In 18 months, we’ve gone from pariah to network partner, a growing indication of TiVo's importance to all sides of the media industry and this clearly underscores the tremendous value that TiVo is bringing to major television industry participants to solve the significant strategic challenges they are now facing in the age of the DVR.

Through this relationship, NBC can provide their advertisers with access to certain TiVo interactive advertising solutions, capabilities which include interactive advertising tags to target fast-forwarding viewers.

NBC also entered into a subscription for our Stop||Watch audience research service which provides insight into the viewership patterns of 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 for 20,000 households who opt in to our consumer panel. This significantly strengthens our research offering even beyond the detailed second-by-second data we already offer and providers marketers with indispensable information so they can make better buying decisions.

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

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

We remain confident that the district court’s judgment in our favor was correct and that our arguments have been well-presented on appeal. We are obviously paying very careful attention to this as a positive outcome 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 forward without allowing it to cloud the perception of progress we are making on the other emerging parts of the business I just described.

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

Also recently, we made a major announcement within the NCTA, the National Cable Television Association, where we have significantly strengthened our relationship with the cable industry in two very meaningful ways related to our standalone business. First, we have entered into an agreement with cable labs and the cable industry that will ensure TiVo HD standalone box users can access and enjoy the multitude of programming that will be delivered through new switch digital video technology. Second, the cable industry has agreed as part of the switch digital solution to be directly involved with the TiVo installation process so that TiVo users have an easy and satisfying installation process.

By having the cable installer involved to ensure the set-up process is successful, we believe both TiVo and cable operators will benefit by having 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 a standalone TiVo box that will have full two-way cable service functionality.

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

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

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

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

Let me review how we are working to better address each of these. First, our offer -- excuse me, first our efforts to differentiate TiVo from generic DVR alternatives continue to gain traction, especially when it comes to making broadband content available directly on the television. We believe that just as the music world quickly became on-demand a la carte, the television industry will follow that same path by providing broadband video straight to the television and viewers will consumer increasing amounts of their programming on an on-demand, a la carte basis.

Importantly, because user interface, search and advertising will be the critical underpinnings of any broadband video offering, and because we have pioneered the only comprehensive solution to those elements, we believe that we are very well-positioned to be the leaders in offering the best a la carte on-demand consumer experience.

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

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

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

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

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

All of this is coming together nicely to position us well for 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 pleased with the progress we’ve made. I will now provide some additional highlights about 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 saw better-than-expected technology revenue, primarily due to new development work we did for Comcast.

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

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

Excluding expenses related to stock-based compensation, cost of service and technology revenues were $14.7 million for the quarter, which consisted of $10.6 million related to service revenues. The service gross margin excluding stock-based compensation was 80%. This was slightly higher than the comparable year-ago quarter.

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

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

With the aggregate stock-based compensation expenses of $7.3 million, 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 $17 million. Our net loss per share was $0.08 per share for the third quarter of this fiscal year and that compares to a net loss per share of $0.12 for the third quarter of last fiscal year. Our net loss per share calculation for the third quarter of this fiscal year was based on $97.6 million weighted average shares.

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

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

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

As is typical, we anticipate that our cash position will increase in the fourth quarter as we receive payments from retailers and direct customers.

Turning over to our key pricing and volume metrics, our TiVo owned 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 new HD box, and slightly better-than-anticipated standard definition activations.

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

On a net basis, our TiVo owned subscriptions increased by 4,000 in the quarter. Our TiVo owned subscription base now stands at approximately 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 now stands at approximately 4.1 million subs. Note that this quarter and going forward, we will classify the DIRECTV subs as part of a broader MSO broadcaster category. 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 per user was approximately $9. The average monthly price paid by a new TiVo owned subscription remained at solid levels well above our average ARPU of $9. Despite the higher levels of new subs coming in, we saw a slight sequential ARPU decrease from lifetime users that had become fully amortized.

In addition, we saw a number of our existing subs converting to longer term contracts with lower monthly ARPUs. As we discussed last quarter, these fully amortized lifetime users do not contribute to subscription revenue but remain in our subscription base, negatively impacting our ARPU calculation.

At the end of the quarter, we had approximately 190,000 cumulative active lifetime subscribers that had reached the end of their 48-month amortization period that we use to recognize lifetime revenue. This represents 28% of our current total lifetime subscription base, which stands at 687,000 subscriptions.

Getting into subscription acquisition costs, our total acquisition costs were $20.9 million, and that compares to $23.5 million in the third 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 marketing activities and lower gross adds. Looking to the fourth quarter, we anticipate that SAC will decrease as we benefit from seasonal increases in gross adds and as we have slightly less marketing expense.

Now, turning to guidance for the fourth quarter, we expect service and technology revenues of between $58 million and $60 million. Of this, we anticipate service revenues will benefit from sequential increases in TiVo owned subs, as well as from the recognition of approximately $1 million in DIRECTV deferred revenue. We also anticipate technology revenues to be slightly increased compared to the third quarter of this year.

We currently expected our fourth fiscal quarter adjusted EBITDA results to be in a range of a loss of $2 million to $5 million, and that compares to adjusted EBITDA loss of $15 million in the fourth quarter of last year. 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 of last year. The anticipated year-over-year improvement in adjusted EBITDA and net loss is primarily due to lower hardware subsidy and lower rebate expenses expected in the fourth fiscal quarter.

As you can see, we are on pace to make a suitable improvement to adjusted EBITDA in this fiscal year compared to last fiscal year’s adjusted EBITDA loss of about $30 million. Our adjusted EBITDA improvement through the first nine months of this year compared to last year was 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 a fourth quarter guidance of fiscal 2008, our adjusted EBITDA is on track to be a loss of approximately $6.2 million to $9.2 million, which again includes the impact of the $10.5 million net inventory related charges.

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

Second, the financial profile of our standalone business continues to improve as we shift away from extensive hardware subsidies. This has allowed us to improve our adjusted EBITDA performance while continuing to develop this business further without undermining our emerging growth opportunities.

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

Question-and-Answer Session

Operator

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

Tony Wibel - Citigroup

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

Thomas S. Rogers

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

We did see some lifetime take-up that’s been instituted just very recently in terms of existing subs being able to make that available to give to new subs, which we are hoping to broaden the availability on a promotional basis to our existing subs to be able to offer that to new people they 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 are many different ways to market to the existing base and we not only want that to apply to new hardware offerings but new feature offerings and how we market to the existing base our content offerings in particular, to get the buzz going on that is something we’re very focused on.

Tony Wibel - Citigroup

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

Thomas S. Rogers

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

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

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

Operator

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

Tony Wibel - Citigroup

Thanks, Tom. That was all I had.

Operator

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

Ingrid Ebeling - JMP Securities

-- correct, for the Comcast subscribers?

Derrick Nueman

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

Ingrid Ebeling - JMP Securities

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

Thomas S. Rogers

Right.

Ingrid Ebeling - JMP Securities

And will the economics be similar to those of DIRECTV for you?

Thomas S. Rogers

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

Ingrid Ebeling - JMP Securities

Okay, and it sounds like you are not going to be disclosing how many Comcast subscribers you get with the one MSO customer line you are going to have, but I was wondering if you could give us a little bit of flavor on how many people have signed up for the e-mail notifications in the Boston area 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 up online and tell them that they are ready for the product here and we’ve actually had not only a lot of people, and Comcast hasn’t made those numbers available so we’re not going to make them available. But it’s interesting to note that a lot of people beyond the New England area where this is being made available have also gone online to say hey, we want it and we’re ready, so we’re glad to know there are people around the country waiting for this.

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

Ingrid Ebeling - JMP Securities

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

Thomas S. Rogers

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

Ingrid Ebeling - JMP Securities

Okay, great. Thanks a lot and congratulations.

Thomas S. Rogers

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

Operator

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 - Piper Jaffray

All right, thanks, guys. Basically, if you look at the technology revenue, and you said it’s going to be up quarter over quarter. Is that just a continuation of development revenue with Comcast and is there the potential that this is going to fall off then in Q1? Or what are your expectations? I guess basically, will this continue to be a fairly unpredictable line item or are we going to be at a new plateau where we can grow slowly from there?

Thomas S. Rogers

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

Mike Olson - Piper Jaffray

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

Thomas S. Rogers

What the what revenue is?

Mike Olson - Piper Jaffray

The audience measurement business.

Thomas S. Rogers

No, we have not broken that out, nor have we broken out the ad solutions business revenue. Our goal here with the audience research business 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’ve been 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 more involved with their own modeling being dependent on the granular data that we provide, 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 - Piper Jaffray

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

Thomas S. Rogers

Well, they have been making available on a very limited basis the non-Comcast employees, real subscribers, real homes, but they haven’t made any secret, nor have we, about the fact that marketing hasn’t lit up and they are not making it widely available until it does. As I said, we think that will occur shortly and your question really goes not to when it will be available but what the growth trajectory will be once it is, and we -- I don’t want 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 best versus others and which kinds of ads to which kind of customers work best versus others. But we consider this to be a very significant element of our growth potential going forward, not only with Comcast but later with Cox and with that, we consider that to be the key means for our overall sub growth in time increasing.

Mike Olson - Piper Jaffray

Okay. Thanks a lot.

Operator

Our next question is from Dan Ernst with Hudson Square Research.

Dan Ernst - Hudson Square Research

Yes, good evening. Thanks for taking the call. Two, if I might; first on Comcast, could you give us a little more color on what the hold-up has been? Is there ongoing technical issues with download? Is there an opportunity 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 not going to roll out to more markets over the next year?

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

Thomas S. Rogers

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

Dan Ernst - Hudson Square Research

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

Thomas S. Rogers

Okay, well, on the latter question, advertising certainly benefits substantially by increased number of subs. That’s certainly the single biggest 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 what it is is the biggest inhibiting factor on the growth of ad sales.

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

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

And so what we are finding is not only is the granularity and the detail and the analytics of what we provide unique but the base upon which it is drawn is more than substantial for the purposes people are looking at now.

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

And so as I’ve said, they’re coming around the corner on the final 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 time and the issue of rolling additional markets from there, their expectation is certainly that will occur within the timeframe that you mentioned. We know unanticipated things can hit us along the way. We’ve been dealing with that in this project, nothing that isn’t cutting edge technology where it doesn’t involve hitting certain unanticipated issues or risks. But based on what we’re seeing, both we and Comcast are feeling very good about the ability to get this rolled out quickly.

Dan Ernst - Hudson Square Research

Just to qualify that, earlier in the year, or maybe it was late last year, the calls blur together, but you had made the comment at one point in time that you had expected by the end of this calendar year to see a substantial number of markets, so even if we push that out one year, could you still have that clarification for calendar year ’08, that we would be at a substantial 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 the stability issues and making sure that other markets are fully prepared, and two, making sure the marketing formulations that we are going to be putting to work there, that Comcast is going to be putting to work in the New England area, 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 to put myself in Comcast’s shoes on predictions there, but certainly our goal is to be multiple markets rolling over the course of the year and the sooner that those two items are able to be dealt with with confidence, you will see that.

Dan Ernst - Hudson Square Research

Great, thanks.

Operator

Our next question then is Todd Mitchell of Kaufman Brothers.

Todd Mitchell - Kaufman Brothers

Thank you. I have a question about the agreement with the cable industry for them being involved in installation. Could you qualitatively flush out what that means? Does this mean that they will be involved as a reseller? Are they going to be carrying inventory? I mean, is there a truck roll involved in here and if so, how is that paid for? Also, is there some kind of mechanism for referrals in terms of the operating guys? I know the DBS guys get -- can get a splice for a referral on customer or an upgrade if they leave a tag at the house. And lastly, is this in principle meant for MSOs other than the Cox and Comcast where you have a downloadable offering? Or would this be in addition to that for customers who basically wanted a standalone box instead of the 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 cable operators, even those that we have software development deals with because all of them would have standalone TiVo customers that use cable card technology because they want the advantages and the advanced features that come with a TiVo standalone box versus the version of TiVo that’s available through the software upgrade.

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

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

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

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

Derrick Nueman

Next question.

Operator

It is from Kunal Madhukar with Bear Stearns.

Kunal Madhukar - Bear Stearns

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

Thomas S. Rogers

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

Matthew Zinn

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

Thomas S. Rogers

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

Kunal Madhukar - Bear Stearns

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

Thomas S. Rogers

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

Kunal Madhukar - Bear Stearns

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

Matthew Zinn

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

Kunal Madhukar - Bear Stearns

Thank you.

Operator

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

Lee Westerfield - BMO Capital Markets

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

Operator

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, just a number; did you break out the rebate revenue and rev share number that was within 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

Yeah.

Barton Crockett - J.P. Morgan

Okay, great. Thank you. Secondly, Tom, I was wondering if you could comment on if you are vindicated in this EchoStar appeal, either through a settlement or through a decision or both, what would that -- you said that this could have multiple benefits for you in your script. I was wondering if you could elaborate -- how would this affect your ability to negotiate with the 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 have an awful lot of value in the user interface in the area of search and the area of various features, as well as ad solutions and audience research that go beyond what our patent protection is but obviously, having a key patent like this affirmed would add a clear strength to our overall negotiating position in terms of distribution.

Our goal is to enter into commercial relationships that value our innovative approach as well as our patents, and having a major statement on this on the patent front would certainly strengthen those overall positions in the negotiating table. Beyond that, I don’t want to comment on any specifics but I think all recognize it would certainly strengthen our posture there.

Barton Crockett - J.P. Morgan

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

Thomas S. Rogers

Yeah, we are quite happy with our current financial team here. We think we are making good financial progress. We are doing a good job of making sure we have the right controls and ability to assess our ongoing financial performance. Cal has stepped in and done a very good job on an interim basis and [Brinel], who works with him, has done a great job on the controller and treasury front. We continue to have a search and are evaluating candidates 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 not hire someone from the outside?

Thomas S. Rogers

Beyond what I just said, I really don’t think I have anything further to offer, but our current situation is one I’m comfortable with?

Barton Crockett - J.P. Morgan

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

Operator

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

Alan Gould - Natexis Bleichroeder

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

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

Thomas S. Rogers

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

Our overall blueprint here for installation work with the cable industry though again goes beyond this additional device. This is about making 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 but puts the cable installer in a position to make sure that this TiVo box with its cable card and new device dependencies is one that is put together well and successfully for the subscriber.

On the second question you asked again was what?

Alan Gould - Natexis Bleichroeder

The pricing change on the one-year.

Thomas S. Rogers

The pricing change on the one-year -- well, our -- we instituted some promotional pricing for the holidays which included the offer that you set forth. Part of that was made available, of course, the last holiday we were basically offering boxes for free and needed to recoup the entirety of the hardware off the back of the service fee. As we’ve introduced new hardware and HD hardware where there’s no subsidy when we sell it direct and a much smaller subsidy when sold at retail, it certainly gave us an opportunity to lower service fee pricing and to attempt lowering of service fee pricing 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 holiday sales, it’s really too early to assess what the full impact of that might be.

Alan Gould - Natexis Bleichroeder

Okay. Thanks a lot, Tom.

Derrick Nueman

Thanks for joining us and we look forward to talking to you further.

Operator

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

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