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Executives

Derrick Nueman - Investor Relations Professional

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

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

Naveen Chopra - Senior Vice President of Corporate Development & Strategy

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

Analysts

Edward S. Williams - BMO Capital Markets U.S.

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

Anthony Wible - Janney Montgomery Scott LLC, Research Division

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

Paul Coster - JP Morgan Chase & Co, Research Division

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

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

Eric Wold - B. Riley & Co., LLC, Research Division

Andy Hargreaves - Pacific Crest Securities, Inc., Research Division

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

TiVo (TIVO) Q1 2013 Earnings Call May 30, 2012 5:00 PM ET

Operator

Welcome to the TiVo First Quarter Fiscal Year 2013 Earnings Conference Call. With that, I would now like to turn the call over to Derrick Nueman. Please go ahead.

Derrick Nueman

Thank you, and good afternoon. I'm Derrick Nueman, TiVo's Head of Investor Relations. Welcome to the First Quarter Conference Call Ending April 30, 2012. With me today are Tom Rogers, CEO; Anna Brunelle, CFO; Naveen Chopra, SVP of Business Development and Corporate Strategy; and Matt Zinn, our General Counsel.

We have just issued a press release and 8-K detailing our first quarter financial results. We also posted a first quarter key metric trend sheet on our Investor Relations website. You may access a recording of this call over the next 2 weeks. Our prepared remarks today should last about 25 to 30 minutes, followed by a question-and-answer session.

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

Additionally, some of the metrics on today’s' call are non-GAAP. Please see our first quarter metric trend sheet on the Investor Relations website for a reconciliation.

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

Thomas S. Rogers

Thanks, Derrick, good afternoon, everyone. We are more excited about our business now than ever before, and here's why. First, given our current subscriber run rate, we are on a pathway to add close to 1 million subscribers in the next 12 months, and this will lead to meaningful revenue growth during that period and ultimately, will lead to an increase of tens of millions of dollars of incremental MSO revenue over the next several years. Second, we fully expect to sign new distribution deals in the near term. Third, we continue to protect our intellectual property and believe there is potential for us to realize further upside in this fiscal year. Finally, should we continue to see a gap between the value we are building in our business and how the market values it, we will continue to look for ways to drive value, including buying back shares.

Now let's start off by putting some color around this quarter's earnings results. In some ways, financial results this quarter were not as straightforward as we would have liked, but as we cover the specifics today, I think you'll see that our underlying trends and growth opportunity remains solid. As Anna will cover in more detail, we had an unexpected inventory charge and higher-than-expected legal expenses that put some pressure on earnings. Regardless, these challenges do not alter our confidence in our expectations for the rest of the year and beyond.

Now, on to the positive highlights of the quarter. Our financial results were highlighted by 40% year-over-year revenue growth and a significant improvement in year-over-year adjusted EBITDA when excluding the impact of the past damages from the DISH settlement.

The global adoption of TiVo continued as we grew our subscription base by 400 -- I'm sorry, 524,000 subscriptions year-over-year and doubled our growth rate from the previous quarter.

We continue to protect our intellectual property. Just as our innovation helped revolutionize the TV On Demand era, recent innovative efforts have positioned TiVo to lead the whole home television consumption and TV Everywhere experience movements, as well as the transition of the viewing experience to IP delivery.

We are experiencing success because cable operators are increasingly demanding a product that contain an increasingly chaotic array of content choices. Consumers are now exposed to millions of pieces of content from a whole host of sources whether from traditional TV, broadband-delivered content or operator video on-demand.

The problem for consumers and, as a result for operators, is that more content and more devices mean more chaos, and more chaos means an ever-increasing need to organize all of this content in a way that makes it easily accessible and customizable.

Not only are consumers demanding any movie or television show whenever they want it, they're also demanding them wherever they want it on multiple devices and screens. Moreover, consumers want the flexibility to view the shows they care about most, which tend to be the ones they record on those devices. This trend is becoming even more critical to operators given that there have been close to 70 million iPads sold since the first model debuted and the appetite for tablets only continues to grow.

Our ability to seamlessly bring together live and recorded television, video on-demand and over-the-top content via broadband and integrate all of it into a simple, easy-to-use approach, is unmatched in the market today. Our elegant user interface brings that content to the consumer and increasingly across multiple screens, meeting a key need for consumers and the operator community that increasingly understand the importance of what we offer. That, coupled with the track record of operators who are deploying TiVo and are seeing improving customer satisfaction, lower churn, and more video on-demand usage is gaining us further traction with operators.

Many people have asked us why we continue to focus on the operator community in an age when large, branded consumer electronics and Internet companies are spending significant time and capital to undermine the role of the cable operator. The simple answer is that we view cable broadband as the centerpiece of the television ecosystem. Broadband and pay-TV are intertwined and as more and more content is housed on the Internet, broadband is rising to the forefront as the key delivery mechanism for bringing television content into the home. Thus, we believe it's critical that we align and collaborate with the players we believe will be the key winners in the deployment of advanced television solutions because of their control of the most robust video pipe.

Virgin Media continues to be a wonderful example of how strategically important our product has been in bolstering cable TV offerings. Virgin Media recently reported that it added 242,000 TiVo subscribers, bringing the total to 677,000 or 18% of its entire base in just over a year's time.

Virgin Media is growing its pay-TV subscriber base faster than its key competitors, a significant reversal in trends and remarkable given the tough economy in the United Kingdom. We believe that this is evidence that the TiVo offering is fueling a substantially improved competitive position for Virgin Media.

Beyond Virgin Media, we continue to see very good results from our other operator relationships, both ONO and Grande doubled the number of TiVo subscribers since last quarter; RCN and Suddenlink continue to contribute to our momentum and DIRECTV is now live nationwide.

Additionally, we continue to work closely with Charter to get broader distribution of our product beyond the Dallas Fort Worth market, as well as integration with future platforms.

These activities are consistent with some of the observations Tom Rutledge, CEO of Charter, made during last week's Cable Industry Conference in which he characterized TiVo as "a great user interface" and Charter's relationship with TiVo with respect to potential future platforms as one that "can evolve through time."

Our Comcast offering, which enables access to Comcast XFINITY On Demand content on TiVo Premiere is now live in the San Francisco Bay Area with marketing just getting underway. This is the first and only offering in the country that brings together linear television, operator video on-demand and the key over-the-top services such as Netflix, Hulu, YouTube and Amazon in a one-stop shop approach, using TiVo's user interface. We also expect to launch the product in additional markets over the next several months.

We continue to have encouraging discussions with both new existing operators across the globe as they look to make the very important decisions as to how television is delivered in the future.

TiVo's advanced television solutions place us smack in the middle of the transition to IP delivery, cloud-based service and TV Everywhere implementations. We understand this is one of the most important technology decisions for operators today, and they are going to be prudent and deliberate in their decisions. Yet a deep look at the various options out there very much favors TiVo, not only due to our track record in framing a great viewing experience, but also the fast implementations we have accomplished compared to vendors that have toiled much longer in the space than we have.

To that point, let's talk about some of our recent innovations. TiVo Stream, our latest offering, will easily deliver much of the content available on TiVo Premiere to second screens such as iPads and iPhones. This product builds a real hole in the marketplace.

The best indication of which programs people most care about are those they record, and yet to date, the cable industry has had no way to get recorded programs to the tablet, which has become an increasingly important viewing device. TiVo now solves for that. A well-known reporter labeled it as innovation "born to blend 2 favorite ways of watching TV."

Second, we announced the thin IP set-top box that helps cable operators make available the TiVo interface across all the televisions in a customer's house and to do so in a very cost effective way that's highly responsive to a cable operator's desire to come up with advanced TV plans that involve lower CapEx investment.

This new set-top box gives consumers access to live and recorded TV, operator VOD, plus broadband-delivered content on every TV in the house in the same way as they would get with a set-top box with a hard drive.

In addition, we will be launching our TV Everywhere web portal for operators in the near future, allowing them to offer content both in and out of the home on the iPad, on a computer or a connected device. This will allow the operator to make sure there is a common interface and thus common experience across all the devices a consumer may want to use to access their TV content.

In so doing, it makes television that much easier and simpler for the subscriber because there is no need to learn a new interface and customer experience every time you pick up a different device.

Finally, updating the progress on our recent deal with Pace, we unveiled at the Cable Show last week, our first offering that ports the TiVo user experience onto the Pace set-top box.

The TiVo-Pace XG1 set-top box is a 6-tuner gateway. Very importantly, for operators, the features of the new TiVo-Pace XG1 will allow them to utilize TiVo's whole home capabilities, which include support for both traditional set-top, as well as IP clients while also embracing TiVo's mobile and tablet applications.

It was very apparent at the recent Cable Show that getting the #1 set-top box maker in the United States to showcase a competitively priced box with TiVo software in it could be a real accelerant to our business.

Shifting gears, on the intellectual property front, our efforts to protect our innovation continued with a favorable claim construction ruling in our Verizon litigation rendered in March and the scheduling of a trial date in the fall. We also responded to the Motorola suit against TiVo by asserting 3 patents, including our Time Warp patent, in our amended counterclaims against Motorola. As part of this action, we also asserted these same 3 patents against Time Warner Cable as a counterclaim defendant. It is estimated that Motorola has shipped well over 10 million DVRs to cable operators in North America to date, which we believe have been infringing our patents. We look forward to driving these cases toward resolution.

I started my remarks by commenting that we're very excited about our business. This enthusiasm also extends to our long-term financial prospects where we believe we can drive substantial revenue growth from our current distribution, additional revenue growth from a strong pipeline of new distribution we expect to bring on and from upside from our intellectual property pursuits. In this regard, all this rolls up to a revenue number over the long term that is in line or better than what is understood by investors today.

Further, over the same period, we expect our cost structure to be reduced as much of our extraordinary litigation expense runs its course and as we drive efficiency in our R&D, as well as other developing revenue opportunities.

This fiscal year, we still believe you're looking at a business that is significantly advancing toward our aim of approaching breakeven adjusted EBITDA, excluding litigations spend for the full year fiscal 2013.

On that point, we expect to see increases in revenue related to current distribution arrangements, as well as cost structure improvements as we exit the year, which Anna will talk about shortly.

In closing, momentum is clearly building in many elements of our business. Our current deals are leading to significant subscription growth. We believe we will announce additional distribution deals in the relative near-term. We continue to innovate; we continue to undertake significant efforts to protect our intellectual property and we expect to exit this year with significantly improved adjusted EBITDA.

We believe this places TiVo in a solid position to drive meaningful shareholder value over the remainder of this year and beyond.

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

Anna Brunelle

Thank you, Tom, and good afternoon, everyone. The first quarter was a good start to the year. Our service and technology revenue grew 40% year-over-year. Our adjusted EBITDA improved considerably year-over-year by approximately $16 million when factoring for the past damages component of the DISH settlement, and our total subscription base grew 524,000 year-over-year or approximately 27% to 2.5 million subscriptions.

Now let's get into some of the details. Service and technology revenues were $54.5 million, and again, this was up 40% year-over-year, the largest increase in 6 years. Sequentially, our revenue increased as well due to a full quarter of AT&T licensing recognition, as well as higher contribution from Virgin Media and technology revenue.

Our cost of service and technology revenue was $14.7 million. Our hardware net loss was $5.2 million, which was impacted by a $2.3 million charge relating to excess inventory.

Operating expenses were $54.2 million. This included $5.4 million in legal expenses, which was about $1.4 million higher than we had originally forecasted due to increased expenses relating to our decision to file complaints against Motorola and Time Warner Cable.

Interest and taxes and other expenses were roughly $1.2 million. This led to a net loss for the first quarter of $20.7 million, which was approximately half of the loss in the year ago quarter adjusting for the past components of the DISH settlement.

Loss per share is $0.17 using a basic share count of approximately 119 million shares. First quarter adjusted EBITDA loss was $10 million, which excluding accounting for excess inventory charges of approximately $2.3 million, as well as higher-than-anticipated litigation costs related to new actions we took during the quarter of $1.4 million, our adjusted EBITDA would have come in slightly above the high end of our guidance range.

Turning to the balance sheet. We ended the quarter with approximately $567 million of cash and short-term investments. The delta between adjusted EBITDA loss and cash utilization was due to timing of working capital and timing of DISH licensing payment.

In our second quarter, we are forecasting neutral cash utilization despite guidance for adjusted EBITDA losses and a $10 million outflow related to the previously accrued AT&T success-based litigation fee, which is now payable to our outside law firm.

Finally, we did not repurchase any shares in the first quarter, so we'll look to opportunistically repurchase shares if the current market environment continues to impact the share price.

Now turning to our first quarter subscription metrics. As noted earlier, we grew our total subscription base by 27% year-over-year to about 2.5 million subscriptions, and we expect this growth rate to accelerate as the year progresses.

In terms of additions, our mass distribution deals contributed nicely during the quarter although it is worth pointing out that DIRECTV standard definition churn still materially outpaced adds from the new HD platform. Additionally, in our TiVo-Owned business, we saw the lowest level of churn in well over 6 years.

MSO ARPU continues to be pressured by Virgin revenue flowing through technology revenue versus service revenue. Importantly, Virgin did account for more overall revenue in the first quarter than it did in the prior quarter.

Additionally, in the fourth quarter, there was a large contribution from DIRECTV versus this last -- past quarter. Next quarter, we expect the MSO ARPU declines to reverse as we anticipate a double-digit sequential increase in MSO revenue as we begin to recognize the vast majority of DIRECTV revenue and service revenue and as we benefit from incremental subscription growth.

Now getting into our second quarter guidance. We expect service and technology revenues of $53 million to $55 million, our net loss in the range of $28 million to $30 million and adjusted EBITDA to be in the range of negative $16 million to negative $18 million.

With that, let me provide a bit of detail on cost assumptions included in our Q2 guidance. First, we expect to see a very substantial percentage increase in litigation expense compared to Q1 as we prepare for our fall trial against Verizon and its very significant activity, including a possible claim construction hearing in the Motorola case this summer.

Additionally, the increased activity from the Motorola and Time Warner litigation will cause our expected full year litigation spend to increase from our earlier expectation, though we still expect it will be less than last year's level.

Second, we expect to see increased sales and marketing expense this quarter relating to promotion of our Comcast offering, which we believe has the potential to drive increased TiVo gross adds for fiscal year 2013 versus 2012.

And third, we expect R&D spend to be roughly flat with Q1 despite our efforts to accelerate our roadmap and deliver more products that focus around cloud-based services, IP delivery of television and TV Everywhere that position us for the future.

Finally, consistent with our view from our last earnings call, we still expect to significantly advance toward our aim of approaching breakeven adjusted EBITDA, excluding litigation spend for this full fiscal year 2013.

We expect sequential quarterly increases in MSO/Broadcaster revenue throughout the remainder of the year driven by successful deployments with our existing customers and cost structure improvements, specifically around research and development.

With regard to research and development, we expect to spend $5 million to $10 million less in the back half of the year as compared to the first half of the year due to the launch of several of our products, including TiVo Stream and the TiVo IP set-top box and the completion of our common code base effort, which is intended to make future deployments quicker and more efficient.

With our progress gaining more penetration within current distribution deals, our continued efforts to find new distribution, potential upside from litigation and our expected lower R&D annualized run rate as we exit this fiscal year, as we believe we are on the right path toward long-term growth and sustained profitability.

With that, let's now take questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Edward Williams with BMO Capital.

Edward S. Williams - BMO Capital Markets U.S.

A couple of quick questions for you. Can you talk a little bit about, Anna, the difference in the expenses for legal relative to marketing in the current quarter? How much of that delta and the adjusted EBITDA difference in second quarter versus the first quarter is attributable to marketing?

Anna Brunelle

Yes, sure. I think that we don't generally give that much of a level of a detail on guidance, but I think you can see historically that we've been cautious in the amount of money that we're willing to spend on marketing, and so it'll be a very measured increase there. And I hope that gives you enough color that you can begin to move forward.

Thomas S. Rogers

Let me just add on that point, the SAC and sales number for this last quarter, Q1, was very low, probably the lowest it's been in a few years, relative to SAC and sales spend. So the next quarter, Q2 quarter spend there, certainly will be higher.

Edward S. Williams - BMO Capital Markets U.S.

Okay. And then, another question with regards to new distribution deals. Given the success that you've had with Virgin Media, what's the holdup that you're running into with regards to additional partners working with you in a similar style arrangement?

Thomas S. Rogers

Well, I wouldn't say it's a hold up. We'd obviously like deal announcements and quarterly earnings calls to perfectly align, but they -- we can't control that, and so we feel we're making a lot of progress in our discussions with operators and look forward to being able to make further announcements. I look at that, that you got to look at the broader landscape and we've made -- we made a number of announcements, have been working hard on the implementations of those previous announcements. You can look at our competitors out there and look at their general lack of traction, and I think that also frames for you that the operators are being quite cautious in terms of the decisions they've made. What we've done with Virgin, as well as others, has been looked at very closely. And I think we have favorably impressed an awful lot of operators that are in the midst of making these decisions. Although we recognize these are complex issues. They're not quick decisions. They know that it's going to govern the entirety of their consumer offering for a number of years. And I think recently, operators have gotten much more focused on their future roadmaps and wanted to see that TiVo was not just about the DVR and framing the broader broadband to linear experience, but also that we had the full ability to drive a whole home multi-device world, I think with the announcements that we've made at the Cable Show, of things like TiVo Stream, the integration with a manufacturer like Pace toward a whole home approach, the announcement we made today on TV Everywhere with RCN, all demonstrate that those things that cable operators have been assessing, that ability to push forward into the broader realm beyond what we were initially engaged for is very much a part of our repertoire. And with that, I think you'll see more operators coming forward. So overall, I think the -- it's anything, but a stuck or stalled situation, it's just that the deals and the earnings calls don't always so well align.

Operator

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

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

I have 2; 1 for Tom and 1 for Anna. Tom, on the cost of hardware revenues line, $18.5 million versus last year's number, $8.8 million, quite a bump higher. That was sort of the difference between actuals and sort of estimating it in terms of what we were carrying in our internal models. I mean, given that you're about to announce other cable deals as you sort of alluded to in your prepared remarks, why be in this business at all? Why not just get out of the stand-alone business completely and rely, obviously, a little bit more on higher-margin revenue from the cable MSO business? And then Anna, on your comments about breakeven, adjusted EBITDA breakeven for the year, x the litigation expense, if you expect breakeven for the full year, doesn't that mean you're going to be EBITDA positive by the fourth quarter x the litigation expense?

Thomas S. Rogers

On the cost of hardware, I wouldn't look at that as solely a function, by any means, of what's going on in our stand-alone retail area. We have become a much more significant provider of hardware to cable operators, and that is something that causes us to take on more inventory. I would say that, that is coupled with the trend where other operators are looking for us to build into third-party hardware more and more. So we have some operators who fit one mold for the other operators that fit in another. But that is support for our operator business. At the same time, our retail product SKUs have changed as of late. We've made some substantial improvement to our retail product offerings, which include 1 unit that has 4 tuners, a unit that has memory capacity that's about 7x what the original TiVo Premiere was. And so there's some shipping into the channel of hardware costs that are captured there. And we're also beginning to manufacture non-DVR elements that support both the retail and the operator side, which need to be taken into account as well. I think the overall cost on the retail side of the equation, I think we've managed very well in that, as I said, the SAC and sales costs related to that were as low as they've been in any quarter for a few years. Anna?

Anna Brunelle

David, could you repeat your question for me? I'm sorry, I missed it.

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

Basically, just you're saying that you're going to breakeven on adjusted EBITDA basis for all of fiscal '13 x litigation, doesn't that mean that you're going to be adjusted EBITDA positive in the fourth quarter x litigation?

Anna Brunelle

Well, we certainly haven't given any guidance on that. I think what we do, well not for just for the fourth quarter alone, but let me clarify. I think what we spoke to was that we plan to, as we said, take out about $5 million to $10 million in R&D in the back half of the year. We expect to see meaningful, sequential quarterly growth in our MSO revenues throughout the rest of the year. And I think when you combine those 2 things together, it equals a significant EBITDA improvement. And so we're hoping that, that gives you enough color to complete your model.

Operator

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

Anthony Wible - Janney Montgomery Scott LLC, Research Division

I was hoping you could start off by talking about where you're seeing the greatest MSO interest, are you getting the interest from larger players or the smaller players? And I just kind of go back to some of the larger players delaying roll outs, and obviously, have some commentary coming from Charter about it taking a little bit longer, but are you seeing more of the interest coming from Charter-like levels abroad or do you see it coming from smaller players? Then I have one follow-up.

Thomas S. Rogers

Naveen, you want to take that?

Naveen Chopra

Sure. Tony, I think we've described some of these dynamics in the past, and I don't think they've really changed substantially. In the U.S., our most significant traction is with, I would say, the kind of medium- and small-sized operators, Charter being one of the larger partners that we have, and continued traction with a lot of the smaller players, Suddenlink-type size and even guys that are much smaller than that who are actually able to drive very attractive economics for us in terms of deal and profitability. Outside the U.S., we tend to focus on larger operators, obviously, the cost of deploying our service in an entirely new market is higher, and therefore, we make sure that there are significant operators that we can align with in any of those markets in order to achieve some meaningful scale. So I don't think that set of dynamics has really changed. We are not spending a ton of time chasing the Comcast-type deals in the way that we had in the past. As you know, we have unique relationships with them for a combined retail product that offers all the over-the-top, as well as VOD-type content, but our business in the United States does not depend on getting a Comcast into the type of deal that we have with Virgin, for instance.

Thomas S. Rogers

Yes. Tony, as we've spoken about before, there may be 5 operators in the world of the Comcast, DIRECTV, DISH, Time Warner, BSkyB Hill that are looking at this as something that is doable within their resources. I think just about everybody else, large, medium or small, is looking to a third-party to implement advanced television. So the opportunity is huge. That being said, where we concentrate our firepower near term is one thing, but the size of the opportunity by virtue of the fact that everybody needs to make this transition in the operator world and only a very small number of them may do it with internal resources. And each of those we either have a licensing relationship -- a side-by-side product relationship with or engaged litigation with. And I think that we find ourselves looking at a very, very substantial sub-number opportunity that needs to have solutions and a very few number of people out there offering the solutions that the operators need.

Anthony Wible - Janney Montgomery Scott LLC, Research Division

On the cost side, if I go back last year, EBITDA loss was like $14 million, in third quarter, improved to $10 million and on this quarter, if you back out the items, you're at like a negative $6.5 million. So 3 quarters of sequential improvement in EBITDA. The guidance implies that there's like this $10 million step up. I know you've mentioned litigation and some SG&A in there. But I mean, is that really a $10 million number there? Or is there anything else that is abnormal that you're anticipating in the second quarter?

Thomas S. Rogers

The major component in terms of focusing on something that's unusual for the quarter is proceeding towards major litigation activity with the trials scheduled in the fall with Verizon and the very significant pretrial activity that involves, in terms of unusual activity in the quarter, that would be the one we most have our eye on.

Anthony Wible - Janney Montgomery Scott LLC, Research Division

And so the commentary on the -- getting closer to adjusted breakeven, that's excluding litigation, correct?

Thomas S. Rogers

That's excluding litigation. And as Anna said, that's over the course of the year and over the course of the year, we do expect R&D reductions in the back half of the year.

Operator

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

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

I guess maybe 2 if I can. One is could you tell us what is driving the sequential improvement in third-party subscriber additions that you say you're going to see over the balance of the year? That also talks to the materiality of it, I mean is the improvement mainly DIRECTV, churn easing or is there something else in there?

Thomas S. Rogers

The major components of our subscriber growth will be a variety of MSOs that we are implementing with, and the deals that we announce are all gaining subscriber momentum as we see it over the course of the year. Virgin has been the biggest contributor to that to-date. Others' contributions, we think, will grow significantly over the course of the year. That's one of the elements as we look toward approaching EBITDA breakeven over the course of this year and making progress toward approaching EBITDA breakeven over the course of the year that will contribute to that. We had probably the best quarter in a few years in terms of the net add, meaning, netting churn against gross adds on the retail side that we've had, and certainly the Comcast marketing activity over the course of the year with that particular arrangement may contribute to further strength on the subside of the retail equation as well. But we are most focused on that strength coming from a combination of the MSOs that we're implementing for.

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

Okay. And then you spoke about Comcast driving some incremental marketing spend. And is this truly just a second quarter type of issue? Or is there kind of a step up in just normalized marketing spend as Comcast goes San Francisco and then other markets throughout the year?

Thomas S. Rogers

There may be some additional support as those markets roll over the course of the year. I just want to remind everybody that while Comcast is an operator deal, unlike our other operator relationships where the MSO drives the sub and the marketing spend related to the rollout, this is a quasi-operator retail deal with Comcast, and therefore, it has a retail-type ARPUs, which are quite attractive. But at the same time, while Comcast will be installing and marketing, we will do some share of that marketing as well, and where we do light up, we want to make very clear how unique this is to have a combination of their cable service, their XFINITY On Demand, the TiVo DVR service, the full package of broadband content services like Netflix, Hulu and YouTube, and the uniqueness of having all of that being provided through an arrangement where the cable operator is taking the cable card friction out of it, installing it, et cetera. And so we are looking to support that in the various markets as it rolls over the course of the year.

Operator

Your next question comes from line of Paul Coster with JPMorgan.

Paul Coster - JP Morgan Chase & Co, Research Division

The R&D expense coming down in the second half, you clearly have some confidence that will happen. My understanding is that most of the R&D is focused on new products, and we've seen those come to market, but also much of it is focused on integration into the MSO platform. And in the event that you're winning new MSOs, won't that cause your R&D expense to tick back up again? And is there a risk there that the good news yields higher R&D than you are currently anticipating?

Thomas S. Rogers

Naveen?

Naveen Chopra

Yes. So a couple of comments on that. The portion of our R&D that is related to integration is a relatively small piece, I mean, it's material, but relative to the type of reduction that Anna spoke to, it would be quite small. So I don't think that those 2 things are necessarily in conflict with one another. Certainly, our projections for R&D expense over the course of the year obviously incorporate some expectation of bringing on new deals. Part of the reason we're able to do that, in addition to bringing the cost down is that in most cases, the -- we've been quite successful in getting operators to bear a big piece of that burden. And so most of the expense that we've had to carry over the last year, 1.5 years, has been more on kind of core R&D, core new products as we've spoken to. Obviously, there is a scenario, if we are extremely successful in signing new deals, where maybe there are some incremental expenses, but I think that would be a very good outcome for, if that were the case. But not one that we think is necessary to bring on some deals.

Thomas S. Rogers

Just to that latter point, there are some -- there are different kinds of implementations for our operators, and some of them leverage very significantly, work we've already done, and other deals might be of a totally different ilk that require more R&D than simply leveraging work that has already been completed. And as Naveen said, we have factored some of that in, obviously, to the extent we engage in a operator project that does not have foundational elements that can easily be built on, that changes somewhat the -- our view of that. But the key efficiencies that we're looking at over the back half of the year that cause us to be able to see how R&D expense can come down is that we have put a lot of work into building our engineering infrastructure and code merging and revisions of code, that have soaked up a lot of engineering resources, but haven't had much by innovation to be able to show for them even though it's been critical work to position us for everything else we want to do. We've been able to bring down substantially -- over the course of the year, we will be able to bring down that kind of investment and begin to get the yields and innovation that we had always positioned ourselves to be able to get from that investment. And you're beginning to see that with the IP set-top box, with TiVo Stream, with the announcements of TV Everywhere, the more apparent innovations that have come from that investment, we're now able to bring to the market.

Paul Coster - JP Morgan Chase & Co, Research Division

Okay. I'm little bit new to the story, so I apologize if this is a stupid question, but the ARPU for the MSOs was down pretty significantly. I think I understand it has something to do with the artifacts of DTV subscriber numbers and churn. And perhaps, certainly, you can just talk me through that very quickly. But also, it looks like it's going to bounce back up 10%. But then does it decline onto volume breaks for the remainder of the year?

Anna Brunelle

Yes, I think I can help you with that. As you alluded to, there's been a couple of things that have been moving ARPU around for operators. Our ARPU has continued to be pressured by the Virgin revenue flowing through technology revenue rather than service revenue. We spoke about that in prior quarters. And then in the fourth quarter, there was a larger contribution from DIRECTV, and next quarter, we expect the MSO ARPU declines to reverse as we expect a sequential increase in MSO revenue. And that's as we begin to recognize the vast majority of the DIRECTV revenue and service revenue and as we begin to really benefit from some incremental subscriber growth. So that being said, to try to put some, to help you out a little bit and put some book ends around how we're anticipating MSO ARPU might look for -- going forward for the next few quarters, I think we could say that the last quarter, Q1 and the quarter before that, Q4, probably are pretty good book ends for what you're going to see throughout the next upcoming few quarters.

Operator

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

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

I've got a few questions. First, Tom, with respect to the new distribution deals, your competitors don't charge monthly fees, at least not directly for the DVR service, some of them charge it for other services, is that an issue? Anna, are any of the -- are all VMED's revenue and service revenue are part of those still in technology revenue? And thirdly, with respect to the share buyback, can you remind us how much the Board has authorized, if you've a 10b5 plan in place, and what has changed that you sound more motivated to buy back stock now and haven't purchased any in the last couple of quarters?

Thomas S. Rogers

On the first issue on monthly fees relative to operator deals, we don't charge for DVR specific, it's the entirety of our user experience offering where we have a model that basically is a per-sub, per-month fee model that takes in to the entirety of the TiVo offering. Others may charge differently. We find that, that model is one that's quite conducive to the operators' view of our value and had a price they're offering in the market in a way that's consistent with how they can recapture it. And so, we've never looked at ourselves as the cheap solution in the market by any means. We are the quality provider with the best consumer experience, but the price of our product in terms of how it's structured for the operator has not been an issue in terms of our deals. I'll hand the second question to Anna. But on your share buyback question, we have been authorized to buy back up to $100 million worth of stock. We are subject to all kinds of blackout periods in terms of when we can actually be in the market. Until recently, the stock was performing quite well and was well above the $7-plus level about 6 months ago that it was at when the Board originally authorized the -- that share repurchase. If the market continues to not see the value we see being created here in terms of the price of stock, I think we will take an extra hard look at the prospect of our ability to go into the market and use that authorization. So while it's always a front and center analysis for us, given the current weakness in the stock, it becomes even more front and center analysis.

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

Tom, if you had a 10b5 plan in place, would that eliminate those blackout periods?

Naveen Chopra

Yes, that would.

Thomas S. Rogers

Is that a question about me, personally or...

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

No, no. The company. Not personal, the company.

Thomas S. Rogers

Yes, it would.

Naveen Chopra

Alan, it would, but there are also limitations on when you can enter into those plans so that's something we have to be...

Anna Brunelle

Careful about.

Naveen Chopra

Careful about as well.

Anna Brunelle

Yes.

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

Okay. And the VMED revenue essence, is it owned service revenue or some of that in the tech revenue right now?

Anna Brunelle

I think for the short term, I would put it through tech revenue in your model.

Operator

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

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

I have 2 questions, and they're not related. The First question is, is there something different with the launch of the retail product with Comcast that will impact this bidding pattern over the year that could be impactful to the bottom line? Are you pulling SACs forward in an inventory build? Are you hoping to keep churns? I noticed it was down significantly year-over-year. I mean, is there some dynamic there that's basically impacting the numbers that we see kind of this lift in revenue in the back half of the year or in the bottom line in the back half of the year?

Thomas S. Rogers

Well, the -- we have very little to go on so far since Comcast is in one market and it just launched in the last few weeks, and the Comcast marketing has really barely begun. So in terms of empirical evidence to drive where retail goes as a result of that, I wouldn't say that we put off a lot of weight on it, but as we did say, we were looking at some increased expense supporting that and the prospect. Certainly, if the product is understood in its differentiated aspects, we think it is something that can continue to help improve the overall retail numbers. But at this point, we're not pointing to that as something of a great significance.

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

Okay. And my second question relates to the litigation with Verizon, Motorola, Time Warner. Help me to understand this. I mean, originally, it seems that the lawsuit was with Verizon and then there seems to be some sort of Motorola indemnification which brought in Time Warner. Now do you believe that you're in the opportunity to settle with Motorola for basically every DVR that they have across every deployment in North America in one fell swoop? Or do you have to break these out operator by operator?

Matthew Zinn

This is Matt. I don't think we're going to answer questions about our litigation strategy on an earnings call.

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

Okay. I mean, okay -- I mean, I'm guessing, just, okay. Never mind, I mean, you're the ones that put out the $10 million or the 10 million DVR number there. I mean, would that have to -- and at the same time, you've said the litigation spend comes down. I mean, this implicates that there's some kind of leverage you're getting in your investment in that litigation spend. And is that leverage the -- a more efficient yield than who you're hitting? I guess, is that -- I mean, is that a fair assessment given what you've put out there?

Thomas S. Rogers

I would say there's substantial investment there. There's substantial opportunity there. We have a track record where I think the investment has been worn out very, very substantially. You're right that Motorola did come into the suit about 18 months after we filed against Verizon basically to support Verizon in the litigation and sued TiVo; we counterclaimed against them, we counterclaimed against -- claimed against Time Warner as part of that litigation. Your question was quite leading in terms of certain things that we have to talk about on as to where we see the litigation going. I would just say overall, we like how things are progressing, we like the rulings that we've gotten to date, and we feel increasingly confident given the track record we have and the investments here are more than worthwhile.

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

And how many sub -- how many DVRs, you said, 10 million in the press release, and do you think that's a good North American number for Motorola?

Matthew Zinn

We think that, that's a conservative number. We don't have the exact figures, but we believe that it is well in excess of 10 million.

Operator

Your next question comes from the line of Eric Wold with B. Riley.

Eric Wold - B. Riley & Co., LLC, Research Division

A couple of questions. I guess, first of all, on the Q2 guidance of $52 million to $55 million in service/technology revenues, I guess thinking about the accelerating ramp you're having in MSO subs, the retail churn at lowest levels, MSO ARPU kind of ramping up double digits, what keeps that guide for Q2 slot with regards to Q1 and essentially the midpoint of Q2 guidance below what was generated in Q1? When do we start seeing that ramp up? And what's the driver that happens in the back half of the year that haven't already seen so far in the first half?

Anna Brunelle

I'm trying to follow all the numbers you're throwing out, but I'll try and just answer the gist of your question, which is, when are we going to see it? It almost sounds like you're asking why we aren't seeing it in Q2. And I think we talked to that we had anticipated the R&D spend to come down in the back half of the year as we've basically been launching TiVo Stream and the TiVo IP set-top box and completing a lot of the progress on our common code-based efforts that'll make deployments faster and more efficient going forward. And so I think that has a lot to do with the crux of the timing. Am I getting to your question? I'm not sure I'm following you.

Thomas S. Rogers

I think, to what Anna said, I think that the variables you pointed to are correct that there will probably be lower tech revenue coming in next quarter, which is really something that fluctuates, as you know, depending on where we are in a particular NRE situation on an operator project. And so as service revenue and service ARPUs and subs on the MSO side grow, there can be a reduction on the tech revenue side that might have offset that, which is why the overall guidance number is about flat with the first quarter. But that really -- remember that those tech revenues go up and down with projects and the MSO and the ARPU progress related to the MSOs are very much there.

Anna Brunelle

I think, Tom is saying that the decline in Q2 is not something that we expect to see quarter after quarter after quarter in the future.

Eric Wold - B. Riley & Co., LLC, Research Division

No, that's perfect. Part of my question was a little confusing. I guess on the second one, just last question, on litigation expense, I mean, do you -- does TiVo get -- do you get more efficient with each new lawsuit? I guess what I want to ask is as you go into DISH last year, then AT&T and Verizon, now you got Motorola, Time Warner, and who knows if other ones come up, do each of these lawsuits essentially start from scratch in a diligence and data-gathering, all that? Or kind of -- can you reuse essentially some of the legal expenses in the past and such that each incremental lawsuit kind of becomes more efficient, I guess, profitable is not the word, but you talked about ROI in the past, but kind of more efficient than the previous ones?

Matthew Zinn

There's a little -- this is Matt again. There's a little bit of efficiency on the TiVo side because we know what documents we have with respect to our own software, with respect to counterclaims and those types of things. But every time you have to have discovery with a new player, there are large costs involved, and there is no efficiency that you get from that.

Thomas S. Rogers

There are also additional patents involved in these litigations compared to some of the previous litigations, which adds to the cost. But in some sense, the claim construction to having built on previous cases, I guess, you could argue that there's substantial value there from the previous litigations in terms of where we are in the current litigation.

Operator

Your next question comes from Andy Hargreaves with Pacific Crest Securities.

Andy Hargreaves - Pacific Crest Securities, Inc., Research Division

Just if we kind of x out Virgin, it still looks like you're losing MSO subs in the quarter. One, is that correct? And can you talk about when you would expect that to reverse and start growing?

Anna Brunelle

I'm sorry, you're really fading out on us. Could you repeat the question a little louder?

Andy Hargreaves - Pacific Crest Securities, Inc., Research Division

Yes, sorry. x Virgin, if we can -- it still looks like you're losing MSO subs in the quarter. Can you talk about when you would expect that to return to growth?

Derrick Nueman

Andy, this is Derrick. I mean, I would say in the quarter, we saw really great contributions from every operator. Obviously, it's on a play on our script. We're still seeing standard definition churn from DIRECTV. That's offsetting a lot of our MSO and some of our MSO gain. I would say, as our products -- deployments continue to ramp, and as we get more markets and more people online, you'll see better and better results.

Operator

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

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

First question, first, TiVo Stream. Am I to think that, that's a cloud service where the videos are recorded on the DVR, a push back into the cloud for recall at a later point in time?

Thomas S. Rogers

No. It's -- we are developing cloud-based products especially for the operator, and where all the delivery of IP-based services are going in the future, but that really takes Stream share recordings from your DVR to a tablet and does not involve having to back up anything to the cloud.

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

Okay. And second question, revenues look like they're going to ramp up about $50 million this year. You spent $200 million over that last year and this year. What kind of period are we going to get a return on the investment to shareholders? I mean, are we talking about a 10-year period of return? I mean, that is a lot of money to spend. And right now, we're not seeing any huge benefit.

Thomas S. Rogers

Well, I'm not sure what revenue numbers or expense numbers you're pointing to. I would say...

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

Well, you spent $110 million in R&D last year. Based on your comments, you're going to spend $100 million this year, that adds up to $210 million. And it looks like revenues are going to ramp $50 million this year.

Thomas S. Rogers

Well, remember, these -- there are a number of components of our model from retail and advertising and audience research elements to our IP licensing to our MSO revenues. We've been showing particular growth on the latter 2 that we think will continue to ramp for us since they're both extremely promising elements. We know that the key to maintaining that growth is to make sure that you are delivering at the cutting edge of innovation, and we've been able to do that and demonstrate recently some very tangible elements of that, and at the same time, indicate that, that R&D cost will begin to come down. So the revenues will be going up, the R&D expense coming down. We've indicated that while the litigation expense is significant, the litigation expense is certainly not something that we looked at, at these levels as a long term part of the model. And as we further indicated, that over this year, we plan to make a lot of progress toward approaching EBITDA breakeven, having those lines crossed, ultimately getting to the point, over time, where you see x litigation profitability becoming clear and focused. With that, I think you see a lot of progress over a relatively short period of time financially with this company, and that's the essence of your question. Are we making financial progress and how quickly are we making it? And with those trends and the approaching EBITDA breakeven x litigation that we expect to have this year, you see things, I think, coming into much, much clearer focus.

Operator

That was our final question. And I'd like to turn the floor back over to Mr. Rogers for any closing remarks.

Thomas S. Rogers

Thank you. Well, I think you can see the revenues up, subs are up, innovations up, our deal opportunities up, our litigation developments are up. We like the trajectory of our progress, and we will keep you apprised of what will be a lot more of it in the coming months. Thanks very much.

Operator

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

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