TiVo F4Q08 (Qtr End 1/31/08) Earnings Call Transcript

Mar. 5.08 | About: TiVo Inc. (TIVO)


F4Q08 Earnings Call

March 5, 2008 5:00 pm ET


Derrick Nueman - Director, Investor Relations

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

Cal R. Hoagland - Interim Chief Financial Officer


Todd Mitchell - Kaufman Brothers

Alan Gould - Natexis Bleichroeder

Tony Wibel - Citigroup

Barton Crockett - J.P. Morgan Chase  

Kunal Madhukar - Bear Stearns  

Tuna Amobi - Standard & Poor's  

Lee Westerfield - BMO Capital

Ingrid Ebeling - JMP Securities  

Brian Coyne - Friedman Billings Ramsey


Welcome to today’s TiVo fourth quarter fiscal earnings conference call. Today’s conference is being recorded. The speakers for today’s conference are going to be Mr. Tom Rogers, Mr. Steve [Strodelo] and Mr. Derrick Nueman. At this time, I would like to turn the conference over to Mr. Derrick Nueman.

Derrick Nueman

I’m Derrick Nueman, TiVo's head of investor relations. With me today are Tom Rogers, CEO; Cal Hoagland, Interim CFO; and Matt Zinn, our General Counsel. We are here to discuss TiVo's financial results for the quarter and year ending January 31, 2008, which is our fourth quarter fiscal year 2008.

About an hour 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 Q&A 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 comments we may make. These statements relate to, among other things, TiVo's future business and growth strategies, profitability and financial guidance, distribution of the TiVo service domestically with Comcast and Cox, internationally in Australia, Mexico, Canada and Taiwan, growth and innovation in TiVo's advertising and audience research measurement business, TiVo's software development for the cable industry, the results of TiVo's litigation with EchoStar, how TiVo intends to expand its intellectual property, TiVo's future marketing spend and related activities, TiVo's exposure to investment and credit risk, 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 differ very materially from these forward-looking statements.

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

I would like to also 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 are non-GAAP measures. Please see our fourth quarter fiscal year 2008 key metric trend sheet for a reconciliation of these items.

I will now turn over the call to Tom Rogers.

Thomas S. Rogers

Thanks, Derrick. That part gets longer every time, I think. Good afternoon, everybody. A year ago, we shared with you a list of the key business areas on which we would focus our energy and resources to drive TiVo's growth in fiscal 2008 and beyond. We told you that we were innovating in the area of bringing the vast array of web-based content directly to the television. We told you that we were building our mass distribution strategy both domestically and internationally and that a TiVo rollout by cable would become a reality.

We told you that we would launch an attractively priced HD box that would enable us to better address a major consumer electronics trend. We told you that we would more significantly weave TiVo into the fabric of the media industry, where we would partner with the critical players in the industry to come up with a solution for advertisers, ad agencies, and networks for dealing with the increasing numbers of people time-shifting programming through DVRs.

We told you that we would be aggressive in protecting our intellectual property and importantly, we told you that we would make progress in all of these areas while making sure to improve the financial profile of the company.

I am very pleased to say that fiscal 2008 was a very successful year for TiVo in each of these areas.

In broadband, we now provide access to tens of thousands of movies, television shows, and videos and millions of songs. For instance, we have made available to TiVo users more than 20,000 movies and television shows from Amazon, content from over 40 TiVo-cast content providers and soon, thousands of independent films. Over 4 million songs and thousands of music videos, photos directly to your TiVo, the ability to send home movies directly to your TiVo, and we also enhanced the user experience for the many subscribers who have broadband connected TiVos by launching a new form of search, which includes television programming, as well as what’s available to the user via the Internet.

And beyond search, we will continue to make it really easy to get content to the television by integrating broadband content via season pass functionality.

On the mass distribution front, Comcast launched in Boston and Comcast has begun to market the product. We are announcing today that Cox is in tech trials and market launch in New England will be the first market that Cox launches in.

Internationally, we launched in Mexico and through retail in Canada, and we will soon be in Australia through a partnership there. We also developed our distribution and co-marketing relationships with companies such as Windstream, as well as Nero, who we are working with to launch a PC version of TiVo.

And we announced an agreement with DIRECTV to provide some additional features to the more than 2 million plus subs that get TiVo through DIRECTV.

In terms of the HD trend in consumer electronics, we launched a high definition DVR set at an attractive $299 price point designed for mass appeal. Importantly, we reduced our hardware subsidy on this box, making it a break-even offering through our direct channel.

In advertising and audience research, we launched the TiVo stop-watch rating service and we are now working on launching additional research products, such as the demographic rating panel. And due to the collapse of Project Apollo you probably saw a week ago, we now have the only single source panel to provide combined viewership and purchase decision data through our relationship with IRI.

We introduced additional types of unique advertising inventory that helps advertisers better connect with the fast-forwarding television view, and as a result of our efforts here, we now have research partnerships with two of the largest broadcast networks, NBC and CBS, and six of the world’s largest advertising companies, including WPP, IPG, Publicis, Havas, Carat, an element of The Aegis Group, and the Omnicom Media Group, which was just announced this morning.

We have also been successful in protecting our valuable intellectual property. As you all know by now, just a few weeks ago we had an important day here at TiVo when the United States Court of Appeals for the Federal Circuit unanimously upheld the district court’s ruling that EchoStar had infringed on our multimedia time warp patent. The court upheld the full monetary award, as well as the injunction issued by the trial court. EchoStar’s latest attempt to further appeal the case lacks merit and we believe the court will reject it. We are also very skeptical about EchoStar’s claim that is has a workaround. We are confident that the courts will enforce the judgment and the injunction and the full impact of these will become clear.

In terms of financials, fiscal 2008 was a banner year, as we moved closer to adjusted EBITDA break-even, getting within approximately $3 million of it. This is TiVo's best annual performance in its history. Without a fourth quarter accounting change, adjusted EBITDA would have been $2.5 million higher, nearly break-even. This is even more striking when you take into account that we were negative $30 million in adjusted EBITDA in the prior year.

In addition to the financial success we had over the course of the year, we also had a strong fourth quarter. We significantly increased our adjusted EBITDA net income guidance, posting an adjusted EBITDA profit of about $1 million and a net loss of about $6.4 million.

Service and technology revenues were $58.1 million compared with $57 million for the same period last year and within our guidance range. Note that during the quarter, an accounting change was implemented that took the estimate for the life of a product lifetime subscription from 48 months to 54 months, as these subs are keeping the TiVo service longer than we originally anticipated. The change to a longer amortization period impacted service and tech revenues, as well as adjusted EBITDA and the net loss by approximately $2.5 million in the fourth quarter.

I’ll let Cal speak to the other financial details for the quarter and year in just a few minutes, but it’s important to note that our accomplishments in delivering solid financial results is a reflection of our ability to effectively manage our TiVo owned business without clouding enthusiasm for the many long-term growth drivers we currently have in place.

I should also make the point that it is difficult to compare this year’s holiday results with those from fiscal 2007. Compared to last year, we have pulled back our marketing spend substantially. We have significantly reduced our hardware subsidy and our main offering is now our $299 TiVo HD box versus the free offer that it was our focus during last year’s holiday season.

We plan to maintain our more limited spend on marketing while we assess the speed with which consumers recognize the value and importance of broadband distribution of digital video.

Looking ahead, we believe that our feature set of delivering digital content directly to the television is becoming rich and deep, and enough so to create significant opportunities to support new growth in standalone sales.

Subscription acquisition costs in the fourth quarter were the lowest they have been in almost two years, and a significant improvement over the year-ago quarter, where again we gave away boxes for free.

We are also in the process of relaunching tivo.com so that we can more effectively market TiVo in the most efficient way possible. We will continue to focus on managing acquisition costs and driving more efficient marketing spend.

Now let me provide you with some additional detail on the areas of our business that will define our growth in the quarters and years to come. In terms of mass distribution, as I mentioned, TiVo on Comcast is operational in Boston and Comcast is marketing the TiVo service to its subscriber. We expect marketing of the product to increase as Comcast gains greater experience with the offering. Additionally, what’s exciting about this relationship is that TiVo fits seamlessly into Comcast’s plans for making vast amounts of on-demand content available to their subscribers and making both linear and VOD television content easy to find through one interface with a comprehensive search tool.

In addition, our relationship with Cox is progressing nicely. As we announced today, we are in trials and we are working toward a market launch in New England, which is the first Cox market for TiVo. With both Comcast a reality and Cox moving toward launch, our mass distribution strategy is making significant stride, effectively unleashing the power of TiVo beyond the confines of a dedicated hardware consumer electronic business.

We are also looking to expand our distribution internationally. We believe this is a tremendous opportunity to drive sub growth through a model that, like domestic cable distribution, is very attractive. Through our existing international work in Australia, Mexico, and Taiwan, and our domestic work with Comcast and Cox, we have learned how to provide TiVo to a variety of platforms and can drive our distribution growth via multiple paths.

Beyond our mass distribution strategy, cable operators are beginning to realize the benefits of providing their customers with a feature set that goes beyond the applications that they have been offering to this point. In this regard, we are working in conjunction with cable labs toward creating a standalone box that would be capable of providing the two-way services provided by cable operators. In addition, we continue to stay ahead of the curve in this area and have progressed on our work with the National Cable Television Association to make certain that not only will TiVo HD users be able to access programming channels delivered using switch digital technology by the cable operator, but also that the cable industry is involved in making the TiVo installation process easier for consumers.

Moving to our broadband strategy, we continue to focus on driving a better understanding of our broadband feature offering and the enormous world of television choice TiVo makes available to users. We are certainly building toward the dream of getting anything you want to watch on your television whenever you want to watch it.

TiVo continues to distinguish itself as the one box, one remote, one user interface, one stop shop for delivering all forms of broadband content to the television set, along with traditional TV.

We have numerous content partners which, when combined with the hundreds of digital cable channels offering movies, TV shows, and high quality video, TiVo subscribers have literally tens of thousands of immediate choices at any given time.

For many industry players out there, pulling together this content into one platform is only a dream at this point. For TiVo, it’s a reality now and most of our new HD subscriptions are connecting their television sets via broadband.

In terms of our advertising and research business, during the quarter we announced deals with CBS, NBC, and this trend continues today, as we announced a deal with Omnicom Media Group, the major media buying arm of the very large Omnicom Advertising Holding Company.

These three companies, along with many others, have realized DVR viewing is becoming a more significant part of the advertising buying equation every day and many industry experts expect DVR penetration to grow from 20% today to 35% in the next 18 months. Further, just last month over 50% of the advertisers polled in the Association of National Advertisers and Forrester Research’s fourth bi-annual TV and technology survey, stated that when half of all TV households use DVRs, they will cut spending on TV advertising by at least 12% and further cuts will surely follow. That’s more than $7 billion of traditional TV ad spend that will be up for grabs. As such, it will be critical for advertisers to become experts in consumption patterns in DVR homes and we are the only player out there providing them with both new forms of inventory, as well as measurement and accountability tools that enable them to better assess how to reach the television audience increasingly looking to avoid commercials.

In conclusion, fiscal 2008 was a meaningful year in terms of the significant progress we made to grow and build our business. We continue to innovate, to come up with new ways in which television is viewed and consumed in the home. We will further expand our distribution, both domestically and internationally. We will drive greater adoption of TiVo in the advertising and programming network world. We will continue to make certain that the industry has a full appreciation for the value of our patents and we will continue to improve on adjusted EBITDA. The strong momentum we generated in fiscal ’08 will serve us well in fiscal ’09 and beyond.

With that, I will turn it over to Cal.

Cal R. Hoagland

Thanks, Tom and good afternoon, everyone. As Tom mentioned, we are very pleased with our financial performance this past fiscal quarter and year. Before I get into details on our fourth fiscal quarter, let me quickly touch on some highlights for the full fiscal 2008 year.

Service and technology revenues were about $231 million, up 6% compared to the prior fiscal year. Total acquisition costs were $81.2 million, down 11% versus fiscal 2007, driven by the move away from hardware subsidies in our retail business. Net loss was about $31.5 million, a nearly 35% reduction from that in fiscal 2007. Our fiscal 2008 net loss of $31.5 million included approximately $23 million of stock-based compensation and approximately $10 million of depreciation and amortization. And finally and most importantly, adjusted EBITDA improved significantly and closed in on break-even with a loss of $3.2 million, down from a loss of about $30 million in the prior fiscal year.

Now let me quickly walk you through our change in accounting estimate, which has impacted how we recognize revenue for product lifetime subscriptions. Over the course of our annual audit, we and our auditors came to the conclusion that our product lifetime subs are keeping the TiVo service longer than we had originally estimated. As a result, we increased the estimated life and amortization period for subs on standard definition boxes sold prior to November 1, 2007, from 48 to 54 months. This change in estimate reduced our fourth quarter service and technology revenues and increased net loss and adjusted EBITDA, each by $2.5 million.

We also increased the amortization period for new lifetime subscriptions on the TiVo HD DVR, which is offered on a limited basis to 60 months.

I should add that we have not changed our accounting estimate for product -- had we not changed our product lifetime sub amortization period, our adjusted EBITDA loss of $3.2 million would have been better by $2.5 million, nearly break-even.

With that, I will now provide some highlights about our fourth fiscal quarter operating results.

Service and technology revenues were $58.1 million, a 2% increase compared to last year’s fourth fiscal quarter. Again, it should be noted this change to a longer estimated life and amortization period for product lifetime subs impacted service and technology revenues by approximately $2.5 million in the fourth quarter. Additionally, we benefit from better-than-expected technology revenue, primarily due to development work we did for Comcast and the recognition of about $1 million in deferred direct TV revenue, which is not an ongoing revenue item.

Service revenues were $51 million, down 5% for the fourth fiscal quarter year over year. Again, this was impacted by the increased estimated life and amortization period for product lifetime subs of $2.5 million. We also saw a benefit from a slight increase in our base of TiVo-owned subscriptions and again in the recognition of deferred DIRECTV revenues of $1 million. However, we experienced headwinds from the continued decreases in our DIRECTV sub base.

Technology revenues were $7 million, up about $3.6 million from the year-ago fourth fiscal quarter. Again, technology revenues in the fourth fiscal quarter this year were stronger than we had anticipated, primarily due to development work for Comcast.

Excluding about $900,000 in expenses related to stock-based compensation, cost of service and technology revenues were $16.3 million for the quarter, which included $11.8 million related to service revenue. The service gross margin, excluding stock-based compensation, was 77%, which was flat with the comparable year-ago quarter.

Looking at hardware, our gross loss was $7.8 million. This consists of hardware revenue and related costs and expenses, including rebates, revenue share, inventory reserves, and other retail channel costs and expenses. Contributing to the hardware gross loss was $3.1 million related to hardware sold and $4.9 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 were 24%, which decreased sequentially from 25% of service and technology revenue in the third fiscal quarter of this year and from 29% in the third -- in the fourth quarter a year ago. The decrease was driven by lower marketing expenditures. A portion of sales and marketing expenses related to subscription acquisition costs represented 12% of revenues. Research and development was 23% and G&A was 14%.

With aggregate stock-based compensation expenses of $5.7 million, net loss was $6.4 million, including interest income of $1.1 million. This compares to our guidance of a net loss of between $9 million and $12 million for the fourth quarter this year. Our net loss per share was $0.06 for the fourth quarter this fiscal year and that compares to a net loss of $0.20 per share for the fourth quarter of fiscal last year.

Our net loss per share calculation for the fourth fiscal quarter of this year was based on $98.5 million weighted average shares. Our adjusted EBITDA for the fourth fiscal quarter this year was $1 million which, with the accounting estimate change, would have been $2.5 million higher. This compares to an adjusted EBITDA loss of $15 million in the year-ago fourth fiscal quarter and to our adjusted EBITDA guidance of a loss of $2 million to $5 million. In addition to stock-based compensation and interest income of $1.1 million, our adjusted EBITDA calculation for the fourth fiscal quarter of 2008 also adjusts for $2.7 million of depreciation and amortization in the quarter.

The better-than-anticipated net loss in adjusted EBITDA was driven by lower-than-expected operating expenses, primarily due to less marketing expenses, as well as lower hardware losses. Additionally, note that both our fourth fiscal quarter net loss and adjusted EBITDA included the benefit of the utilization of about $4.1 million of our [previously provided] given to our reserves. We also expect a small benefit in our first quarter of this upcoming year. Our inventory reserve for standard definition product now stands at $8.5 million as of January 31st.

Finally, we ended the fourth fiscal quarter with about $99.1 million in combined cash -- that is, cash plus cash equivalents plus short-term investment. The sequential increase in combined cash was primarily driven by payments from retailers and direct customers from holiday box sales. Of course, this cash position does not include damages plus interest aggregating over $100 million that the Eastern District Court of Texas awarded us from EchoStar for patent infringement, and that the United States Courts of Appeals for the Federal Circuit later upheld.

Also, while we are aware that other companies have had significant exposure to high credit or liquidity risk investments, we’ve worked hard to minimize risk and believe that we have a nominal exposure to those risks, having managed the situation quite well, given we have over $30 million in auction rate securities a year ago.

Now, turning to our key pricing and volume metrics, our TiVo owned gross additions were 109,000. Gross adds increased 33% compared to the fourth fiscal quarter last year, which is consistent with the trends we’ve seen over the past several quarters. Additionally, as Tom has noted in his comments, it’s difficult to compare this fiscal holiday results with those of the prior fiscal year. We’ve put substantially less [in subscriber] acquisition costs this holiday season and significantly reduced our hardware subsidy. Our main offering was a $299 TiVo HD box, whereas our focus during last holiday season was a free standard definition box.

Churn was 1.5% per month, up from both the third fiscal quarter of this year and the fourth fiscal quarter of a year ago. This increase was the result of a number of factors, including inactive lifetime subs that had reached the end of their amortization period, as well as some standard definition satellite subs migrating to satellite provider HD product, where we only offer a cable card HD experience.

On a net basis, our TiVo owned subscriptions increased by 33,000 in the fourth fiscal quarter. Our TiVo owned subscription base ended the quarter at approximately 1.75 million subs. Note that this quarter and going forward, we classify DIRECTV subs as part of the MSO broadcasters’ category. This also includes subs from Cablevision Mexico and Comcast, and in the future subs from Cox and [Seven], as well as other non-TiVo owned customer relations.

Our MSO broadcaster sub base declined by 155,000 sequentially from the end of the third fiscal quarter. Given that Comcast became fully available in Boston but the marketing began late in the quarter, there was little offset against the DIRECTV churn. Our overall sub base now stands at approximately 3.95 million subs at the end of January.

For the fourth quarter, our TiVo owned average revenue was $8.47. We saw a sequential decrease in ARPU due to the longer lifetime amortization period of our product lifetime subs.

At the end of the quarter, we had approximately 175,000 cumulative active lifetime subscriptions that had reached the end of their amortization period that TiVo uses to recognize lifetime revenue. This represents 26% of our total current lifetime subscription base, which stands at 684,000 subscriptions.

Additionally, it should be noted we are focused on looking at ways to further monetize our lifetime sub base. To that end, we’ve begun to offer incentives aimed at getting our lifetime sub base to upgrade to a TiVo HD box. We believe this will help us to somewhat offset the number of lifetime subs that may drop subscriptions over time, as well as bring in some additional up-front cash.

Getting into subscription acquisition costs, our total acquisition costs were $15 million in the fourth fiscal quarter this year, compared to $33.6 million in the fourth fiscal quarter of the prior year. Our SAC in the fourth fiscal quarter of this year was about $138 and this compares to SAC of about $206 in the year-ago fourth fiscal quarter. The decrease on a year-over-year basis is due to decreased marketing activities and lower box subsidies. We also benefited from the utilization of about $4.1 million of the inventory reserve. Please note that this was our lowest quarterly SAC in about two years.

On a trailing 12-month basis, our SAC was $294, down sequentially from the third fiscal quarter, but up year over year as it includes about $6.5 million from the inventory charges we booked during this past year, and our heavier marketing spend that we had in the first half of fiscal 2008. Going forward, we anticipate SAC will decrease on a trailing 12-month basis as we benefit from less hardware subsidy and lower marketing spend.

Now, turning to the guidance for the first quarter of fiscal 2009, we expect service and technology revenues of between $53 million and $55 million. Note that in Q1, product lifetime sub revenue will be impacted by the longer estimated life and amortization period we discussed earlier, and we will not have the benefit of approximately $1 million in DIRECTV deferred revenue that we recognized in Q4. We also anticipate that technology revenues will decrease compared to the fourth quarter.

We currently expect that our 2009 first quarter adjusted EBITDA results to be in the range of a positive $5 million to $7 million. We expect a net loss in the range of $1 million to $3 million. Similar to Q4, we expect to benefit from lower marketing spend and hardware losses.

As you can see, we made considerable improvements to adjusted EBITDA in the last fiscal year where we closed to within $3 million of adjusted EBITDA break-even, whereas we had an adjusted EBITDA loss of about $30 million in fiscal 2007. It is our goal to improve our adjusted EBITDA even further in fiscal 2009. To that end, we plan to reduce subscription acquisition costs from where they have been historically and reduce both marketing and hardware subsidies. This is important as we manage the TiVo owned business so that it does not cloud the growth drivers associated with our mass distribution business with substantial upside from the exploitation of our intellectual property, our international prospects, and our advertising and research business, all of which have the potential to provide high margin steady growth for years to come.

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

Question-and-Answer Session


(Operator Instructions) We’ll take our first question from Todd Mitchell of Kaufman Brothers.

Todd Mitchell - Kaufman Brothers  

Thank you. Just a quick question here; would you be willing to let us know in terms of gross adds this quarter on the O&O business, what the breakdown was in terms of the HD and the standard definition box?

Thomas S. Rogers

Well, we’re not breaking out that data specifically. I will say that TiVo HD sales increased quarter over quarter and it’s now our primary SKU in terms of our retail sales activity, where increasingly the TiVo HD at retail was dominating our sales numbers there.

Todd Mitchell - Kaufman Brothers  

Is it fair to say that the standard definition product that was sold was all written down inventory or is there still a SKU, an active SKU there of inventory?

Cal R. Hoagland

Still an active product in the marketplace and yes, it was written down inventory.

Todd Mitchell - Kaufman Brothers  

Okay, and one last -- so it was all written down inventory?

Cal R. Hoagland


Todd Mitchell - Kaufman Brothers  

Okay, and then one last thing -- did I catch that you said that rebates totaled $4.9 million for the quarter?

Cal R. Hoagland


Todd Mitchell - Kaufman Brothers  

Okay, and lastly on the amortization, is it fair to just take the amount that you used to recognize and sort of divide it by the difference in the time?

Cal R. Hoagland

I’m not sure I understood the question.

Todd Mitchell - Kaufman Brothers  

Well basically, I think it was about $6.20 is what you used to recognize for and amortize for a lifetime sub on a monthly basis. Can we just take the amount and divide it by the longer amount of time to get to that ARPU number?

Cal R. Hoagland

Well, you take the life that we had left on the pool and you amortize it over the remaining portion of that life, or an additional six months.

Todd Mitchell - Kaufman Brothers  

Okay. That’s what I meant. Thank you.


Next we’ll go to Alan Gould at Natexis.

Alan Gould - Natexis Bleichroeder

Thank you. Tom, I’ve got a little bit of a philosophical question for you about the hardware business versus the software business. Now that you’ve got Comcast rolling out, Cox in technical trials, you are winning the lawsuit with EchoStar -- I’m just wondering why you continue to focus on having a standalone hardware business, why you work with cable labs in terms of creating a two-way cable card, as opposed to folks seeing more of that resources on just better at getting your system and your service to work with the cable operators, becoming more of a service business, software business with software type of economics.

Thomas S. Rogers

Well, we are devoting more and more resources to cable software, advertising, inventory, audience research, international development activity, so certainly we have focused more on those developing areas relative to the amount of focus that the standalone business has gotten in the past. You mentioned the [old cap] through two-way standalone box and our view of that, while yes that has the opportunity to be a standalone retail product, it also potentially has the ability to be used for my cable operators distributing it as their own set-top once it has the ability to pass through all their two-way interactive services. And we are in discussions with some cable operators, particularly those who might not be able to look toward investing in a software approach for upgrading of their boxes for whatever reasons, and that particular opportunity may be one that is both cable operator based as well in terms of its distribution, as well as retail based.

As a general matter, our standalone business is one where we are looking to cut back substantially on the standalone marketing. As you note from the results, those results were heavily driven by a much more efficient use of marketing funds for the standalone business. But we do believe that the standalone business has some real ongoing value for consumers. As we’ve noted in the past, it is the only opportunity for analog subscribers to get any DVR in the marketplace. I think one of the key reasons that we did see the reversal of some of the write-downs we had taken on standard def inventory is the ongoing appeal to analog subs who are looking for some kind of DVR solution.

But more importantly, as you see a vast amount of broadband content out in the marketplace, which we think will increasingly become a part of how people look to get new television choice to their television set, what we are able to do by way a one box, one remote, one UI, one stop shop for all that content for the time being looks like it can only be realized through a standalone box. And over time, that may change as features may become more deep and rich in other distributors and what we can do with them.

For the time being though, we do see an opportunity developing there and our standalone box becomes the only way we see for some period of time that we will be able to benefit by that from that trend.


Our next question will come from Tony Wibel of Citigroup.

Tony Wibel - Citigroup

Good evening, guys. Congratulations on executing on just so many fronts. I’ll try and limit myself to just one but I was hoping you could comment a little bit on the Comcast numbers that are within the broader MSO line that you disclosed. Given that DIRECTV’s churn is a little high, can you help us kind of get a sense for what is going on within there on the cable side?

And also, can you comment on if you’ve seen any impact from January, February on either the standalone or the MSO side from just macro issues with the consumer?

Thomas S. Rogers

Well, as you know, the Comcast marketing efforts started relatively late in the quarter, so there isn’t much by way of Comcast sub numbers in those overall numbers. I would characterize the efforts though as ones that not only are we quite pleased with but Comcast is quite pleased with.

There’s been -- they are marketing through all kinds of media outlets, although the marketing for the time being has been somewhat limited, but with that limited marketing, I think it’s fair to say they are quite excited by the results they’ve seen.

The surveys that we have done in the market with them show very clearly that there’s a significant willingness to subscribe at the kind of price point that TiVo is being offered at the $295 upgrade, and just measuring from the initial marketing launch activity, there seems to be a very substantial increase in TiVo awareness in the market, so all of those are very good signs.

We are fully expecting as Comcast has stated to us that once they are able to do the automatic upgrades without a tech visit in the home -- I should say when they go to that approach where now they are actually sending a technician to the home still to make sure all goes right and all goes well, but they expect in the relatively near future to pursue the automatic upgrade approach and with that, much more extensive marketing. Based on all these early signs, we expect the subscriber demand and the subs to be right where we hope they would be.

So overall, when I look at the situation in New England and add it to what was Brian Robert’s public comments at the Consumer Electronics Show, that they expect to roll out TiVo in multiple markets over the course of this year, we are looking ahead to a year with Comcast backing of TiVo that we think will be quite substantial.


Next we’ll go to Barton Crockett of J.P. Morgan.

Barton Crockett - J.P. Morgan Chase  

Okay, great. Thanks for taking the question. I guess if I’m limited to one, maybe if you can talk a little bit about the slopes of the subscriber bases here as we look out over the year, and in particular, you have this big kind of sequential up-tick in the churn. You’ve got that transition in the product mix from the SD to the HD on the standalone business, and you’ve got this comment where you’re going to be scaling back the marketing spend and you’ve got a relatively smallish kind of net addition of subscribers. You know, as we look out over the course of the year, should we expect that the standalone subscriber business could potentially be in a place where the base is declining? And similarly in the other kind of DIRECTV line, you know, you’ve got the DIRECTV winding down but the other cable partnerships winding up. Is that similarly going to be a net decliner you think for the year or a grower? And does that reflect on the revenue in terms of net growth or decline? And -- so if you could just give us some sense of the slope. I know you don’t like to guide very specifically but just some sense of how to think about it, that would be helpful.

Thomas S. Rogers

Well, negative net adds is certainly not what we are driving for over the course of the year on the standalone front. The first quarter, as we’ve substantially cut back on our market, obviously it will be a much lighter marketing spend quarter than the first quarter of last year, where we were more heavily spending on the marketing front. That obviously with the fact that still in the first quarter last year, our primary focus was a free TiVo with zero up-front cash on the purchase and our primary focus now is the HD TiVo with a $299 up-front purchase and with that, a real difference.

I would say though that we are looking to drive our Internet based sales more efficiently and more extensively over the course of the year, with a relaunch of TiVo.com and with it a bunch of digital marketing efforts which we think will allow us to not only spend more efficiently but acquire more subs at a pace above what we are currently acquiring on the Internet front, or I should say from our direct Internet based sales.

We are also heavily exploring bundling options with HD TV. I would say that the HD TV television set trend was one where we didn’t fully tie ourselves into that trend as well as I would like to see. We were certainly showcased in certain ways that now that we had a popularly priced HD product that we weren’t before, but an awful lot of the purchase of a television set in the big box retailers involves people responding to good deals, good price cuts on sets. They go in and they make their television set purchase and the ability for a salesperson to steer in the direction of a bundled sale with TiVo, or I should say with sale of a TiVo, was really not part of the fourth quarter sales process.

Over the course of this year, we’re very much looking to see if we can accomplish bundled sales, actually selling the TiVo under some kind of an arrangement with the retailer at the time an HD set is sold and we think with that we could also see a different trendline in terms of what our overall net adds for the year are.

We clearly are suffering some in terms of DIRECTV churn while not having an HD satellite product, our primary product here is a cable card, cable-oriented as well as some telco orientation in our HD product. And with that, there’s been some increase in churn because of that product offering but overall, we are not focused at negative numbers on the net add line for the year.


Next we’ll go to Kunal Madhukar from Bear Stearns.

Kunal Madhukar - Bear Stearns

Thanks for putting me on. A quick question on deferred revenue; I wanted to know, what percentage of the new subs that are coming in are taking multiple year plans?

Thomas S. Rogers

Well, I would say that the majority of subs coming in are coming in on some form of a prepaid plan, as compared to a monthly plan. Those prepaid plans involve lifetime, one-year, two-year, and three-year offerings. The combination of the lifetime, two-, and three-year offerings compared to the one-year offering tends to change somewhat on a quarterly basis, depending on whether we are in a heavy gifting period or not.

I would say in terms of prepaid, the one-year plan in the fourth quarter was the most popular. In the third quarter, you saw the three-year plans coupled with the lifetime offering to the existing base being more popular than the one-year plan, so obviously that differs depending on how heavy gifting is. But overall, the up-front cash that we get from prepaid plans is a positive thing for us and we are getting the majority of our subscriptions on a prepay rather than a monthly basis, based on the fourth quarter.


Next we’ll go to Tuna Amobi from Standard & Poor’s Equity.

Tuna Amobi - Standard & Poor's

Thank you very much. I guess I had a question on the Comcast relationship. I think I was a little bit curious to see why Cox also picked the New England market to roll it out. Is that an independent decision or is there any connection to the fact that Comcast started with that?

Thomas S. Rogers

Well, let me just say we think it’s a good thing. There’s obviously some value in having some concentrated launch activity in a region of the country in certain -- in terms of certain media outlet potentials and the amount of PR and press buzz that gets around, so I -- these are independent companies with independent marketing plans but we are happy to see it.


(Operator Instructions) Next we’ll go to Lee Westerfield of BMO Capital.

Lee Westerfield - BMO Capital

Thanks, gentlemen. Good evening. I’m going to try to sneak in two questions, if I might. The first one -- as you are testing Cox, how does the middleware in the Cox New England systems differ, if at all, from Comcast? Here I’m obviously trying to lead to an understanding of how your efforts to test TiVo software there on top of Cox might proceed.

And secondly, Tom, have you learned anything further about EchoStar’s purported workaround for a DVR service that I gather they assert has been deployed, or is there no new information in the EchoStar workaround?

Thomas S. Rogers

As to your first question, the choice of the New England market by Cox, and this goes in part to the previous question, was in part made because of the similarities of the middleware that Cox uses in that market relative to the middleware that Comcast uses and that made the piggybacking effort, integration effort with middleware as a critical part of our overall development activity. It made the integration with middleware much, much easier work. That doesn’t mean that they are identical in terms of their middleware layers. There are some differences that do involve some additional development work but they are largely similar and that’s a good thing in terms of past the distribution for us.

In terms of the EchoStar, there’s no new information that we have on workaround, other than I’d say that we remain very, very skeptical of any workaround here that EchoStar has put forward and most of the claims they have made in terms of what their position is and where things stand over the course of this litigation have been shown to be totally incorrect and our view is that this will be shown to be totally incorrect as well.


Next we’ll go to Ingrid Ebeling from JMP Securities.

Ingrid Ebeling - JMP Securities

Thank you. How are the HD TiVo boxes doing in the retail channel relative to your expectations? And do you have a sense of if they are new customers or existing TiVo customers? And what should we be thinking about in terms of ARPU as HD gains more traction? Thanks.

Thomas S. Rogers

Well, as I said, HD in retail in the stores has become the primary SKU at retail. The preponderance of sales are of the HD boxes. They’ve grown considerably quarter over quarter. In terms of whether they are going to existing subs or new subs, they are obviously both. We are trying to encourage existing subs to upgrade to HD, as well as bring on new subs. The number of -- the percentage of multi-set, discount subscriptions, meaning of an existing subscriber that is getting an additional box, maybe for a new HD set but taking the old TiVo and putting it on an older set, the percentage of those decreased during the quarter relative to the previous quarter. But as Cal said in his remarks, we are putting together offers to try to encourage the lifetime base in particular to upgrade to HD, since HD decisions have seemed to be one of the key reasons in our churn and with that, we would hope to continue to increase the number of existing subs that have HD while continuing to drive the new offering for new subs as well.


Next we’ll go to Brian Coyne of Friedman Billings Ramsey.

Brian Coyne - Friedman Billings Ramsey

Thanks for taking my call. Most of my questions have been asked so I really just -- a couple sort of bigger picture questions, which -- I was wondering if you could just help me sort of understand how to best gauge your operating progress? You know, given what sounds like sort of a reduction in standalone marketing spending and perhaps less emphasis on sort of growing that base. I mean, is it going to be more on cash flow and earnings per share, given the outlook for better profitability with a lower expense? Is it cable subscriber adds? Is it your advertising business or maybe sort of like international DVD progress?

Thomas S. Rogers

Well, I don’t think there’s one metric here. I think in terms of financial metric, continuing to improve adjusted EBITDA is something that we are highly focused on and would look to do over the course of the year, while we’ve indicated that the first quarter is a very different marketing resources and a very different SKU focus relative to the first quarter of last year, and therefore is probably a light quarter for us. Over the course of the year, we’re looking to be net add positive on the standalone sub and drive increased awareness of our HD offering. Hopefully, through some of the things I mentioned, improve our overall marketing profile while keeping this much more efficient spend of SAC in place and with all that, certainly sub growth is an important indicator on the owned and operated sub side, and certainly growing subs on the cable side is important as well.

I think we look at all of our mass distribution subs, including our international sub count, as a critical part of our improving financial profile and so subs generally is a way to look at our progress.

We wouldn’t expect the add sales revenues to substantially increase while our sub base is at its current levels, although we are seeing increased numbers of advertisers participate with us, so that they become fully engaged and immersed in DVR advertising to prepare themselves for going forward and the number of advertisers we relate to is something we look at closely in terms of the attractiveness of our overall add solutions. And over the course of this year and next, the audience research business is one that, since it is not sub-dependent and we have made major progress getting ourselves into the major companies we talked about, we do believe as we are able to roll out later this year additional products that with additional products, we can make major revenue strides on that business as well.

So all of those are things we measured quite closely all the time. In terms of publicly releasable metrics, of course though, it’s adjusted EBITDA and subs that we will continue to point to in terms of how our progress is going.


Ladies and gentlemen, that is all the time that we have for questions at this time. I would like to turn the conference back over to Mr. Tom Rogers for any additional or closing remarks.

Thomas S. Rogers

Well, thank you, everybody for joining us. It was an important year, we thought, in terms of the financial progress we made and the goal of getting much closer to EBITDA break-even. I think we’ve met and exceeded our own expectations as well as yours. We feel quite good about the mass distribution progress we are making domestically and internationally and can feel that our ability to penetrate there is now a reality, as opposed to something that has been in the laboratory and that to us is a very different footing to be on.

And it is one thing to talk as we did earlier in the year about where the world is going in terms of perception of DVR-based television consumption as opposed to really getting ourselves with our measurement and accountability and audience research activity deeply into television networks and the major ad holding companies, but we feel the progress there has really put us on a footing to be a major player relating to the media industry for many years to come on those fronts. And the announcements today on the Cox front and the Omnicom front we think highlight those two latter points.

And of course, the patent progress was clear. We feel extremely confident in our position. We continue to believe that in the relatively near term, this will all become much clearer and the full impact of this decision and what we have won will become much clearer.

So thank you all for joining us today and we will talk to you soon.


Ladies and gentlemen, that does conclude today’s teleconference. We would like to thank you all for your participation and have a great day.

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