Fiscal Q4 2006 Earnings Conference Call
March 8th 2006, 5:00 PM EST
Marilyn Lattin - Head of IR
Tom Rogers - CEO
Dave Courtney - CFO
Stuart West - VP, Finance
Tony Wibel - Smith Barney Citigroup
Lee Westerfield - Harris Nesbitt Gerard
Brian Coyne - Friedman, Billings, Ramsey
Jeff Shelton - Natexis Bleichroeder
David Miller - Sanders, Morris, Harris
Richard Baldry - First Albany Corporation
Robert Malachi - JP Morgan
Daniel Ernst - Hudson Square Research
Chris Rowen - SunTrust
Lloyd - Thomas Weisel Partners
Robert Hailey - Gabelli and Company
Jeff Schreiner - American Tech Research
Michael Kelman - Susquehanna Financial
J.D. Abouchar - Pacific Edge Investments
John Sheridan - Deutsche Bank
Good day, everyone. Welcome to the TiVo fourth quarter fiscal 2006 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Marilyn Lattin, TiVo's Head of Investor Relations.
hank you, operator. Good afternoon everyone. With me today are Tom Rogers, Chief Executive Officer; Dave Courtney, Chief Financial Officer; and Stuart West, Vice President of Finance. We are here today to discuss TiVo's financial results for the period ending January 31, 2006 which is the fourth quarter of our fiscal year 2006.
About an hour ago we distributed a press release detailing these financial results. We have also released some visuals designed to guide you through the call. Additionally, within a few hours we will release a recording of this call, both in a streaming online format and through a downloadable MP3 podcast. You can access all of these through our investor relations website at www.TiVo.com/IR.
The prepared remarks will last about 30 minutes, and then we will leave another 30 minutes for the question-and-answer session. Before we begin, I would like to note that our discussion today will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that relates to TiVo's future financial results, partnership products and other factors that may affect future earnings or financial results. You can identify these statements by the use of terminology such as guidance, believe, expect, will, or similar forward-looking terms. You should not rely on these forward-looking statements, as they involve risks and uncertainties that may cause actual results to vary materially from the forward-looking statements. We describe these risks in TiVo's recent SEC filings including our annual report on Form 10-K and our quarterly report on Form 10-Q. I'd also like to note that any forward-looking statements made on this call reflect analysis as of today and that we have no plans or obligations to update them. I will now turn the call over to Tom Rogers. Tom.
Good afternoon. Thanks for joining us today to discuss TiVo's fourth quarter earnings. I will cover four topics: highlights of the quarter, new pricing initiatives, feature differentiation, and the distribution update. I'll begin by highlighting some of the trends in the quarter, beginning with a high-level view of our financial metrics. Please see slide 4 for some accompanying notes on that matter.
At the end of the fourth quarter, our total cumulative subscriptions hit approximately 4.4 million, 45% growth over last year. With this increased sub base, our service and tech revenue improved 37% to $47 million in the fourth quarter and increased 48% to $171 million for the year. Our net loss for the quarter improved to $19.5 million, compared to $33.7 million a year ago. On an annual basis, our net loss improved 57% to $34.4 million from $79.8 million last year.
Importantly, fiscal 2006 was our first year with positive cash flow from operations. We want to stress that our current model and mix was able to add 500,000 gross subs before churn on a cash flow positive basis. We think that is a key part of our model that has not been well understood.
Operationally, we added 356,000 net subscriptions during the quarter. Our stand- alone growth subscriptions were 221,000 which is our second-best gross sub add quarter in history. In addition, our stand-alone net subscriptions were also our second best in history, at 183,000.
Let me take a moment to comment on this. These numbers represent a decline compared to last year, reflective of the more challenging competitive environment. However, Q4's results also suggest an improvement in year-over-year trends. For example, Q3 of this year was 47% below Q3 of last year. Q4 of this year was only 27% below Q4 of last year. The percentage sequential growth from Q3 to Q4 also improved significantly between this year and last year. I believe this improvement in the year-over-year trends shows the early traction from our new marketing programs.
We added 173,000 DirecTV subscriptions, in line with our expectations. As an aside, during the holiday season, it appears TiVo's stand-alone units outsold the NDS box. Virtually all of our new subs during the quarter came on board with a one-year minimum contract. This is interesting, because many of the units purchased during the holiday season were given as gifts and therefore the recipient of the TiVo box was the one activating the TiVo service. However, we experienced no consumer resistance to signing up to a minimum one-year contract, even with the obligation to pay up to $150 penalty fee for early cancellation.
Sales through TiVo.com grew to 34% of our hardware unit sales. A significant increase from the fourth quarter of last year. With a bundled offer of one year of service and a box purchased with a single, upfront fee, there was no mail-in rebate. In fact, we had our best online quarter in TiVo's history. Our direct channel is now our most efficient source of new subscriptions in terms of the acquisition cost of acquiring a new sub. Of course our retail channels also remained strong, with the peak holiday week -- the week before Christmas -- just as strong as ever.
Before I move on to discussing our new pricing initiative, I'll discuss our subscription acquisition cost for the quarter. Our SAC was $157 in the quarter, compared $140 last year despite the fact that we raised our rebate by $50. The fact that our SAC has only increased by $17, even with the larger rebate, shows our progress in advertising efficiency. We spent our advertising dollars quite conservatively, while we were assessing what the best pricing and packaging options are. If we see results in the market as promising as the test results, we are going to look to more aggressively market the product.
Let me remind you that we take a conservative approach to the measurement of SAC. Our SAC calculation encompasses all of our sales and marketing costs, including fixed overhead structural costs, not just the variable components which other companies often limit their SAC calculations to. Also, the largest component of our SAC which will be an even larger component in our new zero-base pricing is the hardware subsidy. With the new pricing, those sales do involve an increase in SAC, but the increased pricing also creates a higher net present value per subscription.
Now onto the topic of our new pricing initiative which we just announced today, after completing several months of market research and extensive testing in the marketplace. We believe the additional pricing options being created will have a positive impact on driving our subscription base. When I spoke to you during my first earnings call at TiVo, I said that driving greater scale in our sub base is a critical goal, particularly with stand-alone sales driving a greater part of our growth over the next year, until the Comcast relationship kicks in. Over the past four to five months, we have taken a hard look at our pricing strategy, distribution model and the overall satisfaction of TiVo customers.
Just to remind you, when we tested the direct marketing of these new pricing options by providing longer form, more detailed messaging about the TiVo service, we found that call volume increased, but conversion rates were constrained by disenchantment with having to pay both an up-front fee and a monthly fee. That caused us to test various pricing options that took away the hybrid nature of the offer.
After careful research and testing, we believe that the bundling of the TiVo service together with the TiVo box will be highly appealing to a certain segment of subscribers, particularly analog cable subscribers, which are a prime target for us. We found in testing zero up-front offers we converted subs at a significantly higher rate than our current marketing approach and that result held up through a number of phases of testing. Thus, we will now be offering an all-in-one price based on a one, two, or three-year commitment at $19.95, $18.95, or $16.95 per month, with no up-front hardware cost. You can turn to slide 5 for details.
We also found that a number of potential subscribers under no circumstance want another monthly bill to add to their current array of cell phone, cable, Internet and other monthly charges. Therefore, we came up with pricing plans to be responsive to this kind of customer as well. So as an alternative, a subscriber can prepay $224 for one year of service, or $369 for two years of service, or $469 for three years of service for an all-in package that included the TiVo unit and service combined. With this new pricing plan we will no longer be offering a lifetime service option.
To be clear, this new pricing for now will only be available for sales done through TiVo.com. We are exploring the possibility of launching similar types of programs into retail later in the year. This delay is due to reasons such as tying into the IT infrastructure of retailers, which needs to be addressed. Note that this new pricing initiative will not have much impact to our first quarter sub growth, as it won't be launched until next week.
We think these new pricing plans will be particularly attractive to cable analog subscribers, which are a key target for our stand-alone sub growth. In fact, in the fourth quarter, 49% of our new subs were analog subs. Under new bundled pricing, assuming a conservative set of assumptions, our lifetime value of a subscription could potentially increase by as much as $100 due to higher monthly fees and the benefits of reduced churn. It could increase more, depending on assumptions related to subscriber longevity.
In fact, we are already experiencing lower churn as a result of implementing our minimum one-year contract approach for new subscriptions over the last several months. Our churn has gone from 1% in the third quarter to 0.9% this quarter. Again, with no up-front fee, our SAC does increase by approximately $50 to $100, but as mentioned, we benefit because of higher revenue resulting in a much higher net present value per subscription.
The third topic I want to discuss is product differentiation. We continue to offer a number of major features which are truly differentiated from other DVRs in the market and further counter commoditization. Turn to slide 6 now. Last week, we launched TiVo KidZone, a powerful new tool that provides concerned parents the freedom and flexibility to choose specific television programming appropriate for their families. As part this initiative, TiVo is partnering with leading parenting and family groups including Common Sense Media and the Parents Television Council, the two largest grassroots organizations with over 4 million members between them, to create the first real answer to the 50-year-old question of how to create the right television environment for children in the home.
Families, public policymakers and the media and entertainment industry have been grappling for decades with the issue of what our children can and should be able to watch on television, but they've been unable to find the right solution. Parents do not have the time to create customized menus of what they want their kids to watch and to truly filter the most age-appropriate television for their kids. There are expert groups that represent different philosophies and values in what is good television programming for children, such as Common Sense Media and the Parents Television Council, that regularly provide recommendation menus for parents to follow. What TiVo has create is a simple means by which a parent can choose an entire menu of weekly recommendations for what children should watch, and the TiVo service will automatically record all of those shows so that there will always be a full array of quality TV choices any time the child turns on the TV. A parent can edit this menu by making specific programs or channel additions or deletions to customize an expert's recommendations even further.
Most importantly, when a TiVo DVR is in the TiVo KidZone mode, it locks out all other programming, both live and recorded, for access by children in the home. This is all done with very specific age criteria in terms of choosing individual menu offerings. This is the kind of feature that will continue to distinguish TiVo from generic DVRs. There will be other announcements in the near term on features that we think will further differentiate TiVo from generic offerings, in terms of understanding what is important to viewers in how they watch television.
Finally, I want to discuss our distribution developments. Turn to slide 7 here. First I'll discuss Comcast, which we are on track for rollout towards the end of the year. At the Consumer Electronics Show, we answered what many skeptics had questioned as to whether you could create a TiVo experience writing on top of a generic set-top box. We demonstrated that through a software upgrade without the need for a separate stand-alone TiVo Comcast box, we could put the TiVo experience into cable homes. With this now demonstrated, we are excited by the number of generic DVRs the cable industry is rolling out, because each of those boxes, as additional cable deals are done, becomes a potential TiVo home with both the sub and advertising revenue elements that we believe will create a powerful business model beyond the one that exists for our stand-alone retail business.
On another front, we've also announced an agreement that will allow Verizon to debut the new TiVo mobile application that lets TiVo subscribers schedule recordings directly from their mobile handsets. This partnership allows a growing base of TiVo users to integrate control of their TV life with the most widespread piece of consumer electronics, their cell phone. We expect to launch this service later this year.
On the retail distribution front, we are excited to announce that starting later in the year, Radio Shack will, for the first time, be offering TiVo units in stores. This is not only a great environment for people to be able to learn about the TiVo product, but we are very heartened that a key factor in Radio Shack's decision is TiVo's new TiVo KidZone feature.
While we fully recognize the challenges we must continue to address, we believe we are clearly growing. And with the ways we believe we can accelerate our stand-alone business through new pricing, lower churn, greater focus on the cable analog home opportunity, and the compelling nature of new features like TiVo KidZone, getting to 3 million stand-alone subscriptions is within our grasp.
We believe a focus on the high margin, high revenue segment of the market is a great avenue for TiVo's ultimate success. For example, with 3 million stand-alone subscriptions, TiVo's revenue characteristics could be quite similar to a basic cable channel, delivered to 90 million homes. This potential value of our stand-alone business is before layering in the Comcast deal; before the potential deals with other cable operators we are in the midst of negotiating with; before implementing the revenue upside from our new pricing model; before the upside that we believe we can be recognized from successful pursuit of our patent litigation; and before additional revenue lines which we think can be generated from new, standout TiVo features such as broadband content delivery and digital media center applications. Turn to slide 8.
TiVo is not simply the best-of-breed DVR providing the best way to watch television. It is increasingly going to be a way to bring new forms of content into the home that are not available on cable or satellite. TiVo has the unique ability to display broadband video on a television, which puts TiVo in a unique position, vis-à-vis this vast new source of developing TV programming.
Moreover, it has become clear through announcements we've made relative to Verizon Wireless, TiVo To Go through Microsoft, the Intel iChip, the Apple iPod, the Sony PSP, and Yahoo! Photo Distribution that the TiVo service is increasingly about being the central point of video integration in the home with other digital devices. We see that role growing and cementing TiVo's place as an ongoing provider of simple solutions for an increasingly complex array of digital offerings.
I hope this gives you some insight as to what we are focused on and passionate about here at TiVo. Now I'm going to turn it over to Dave Courtney. Dave.
Thanks, Tom and good afternoon. We have grown our revenues substantially both annually and quarterly versus last year, while holding operating expenses at a reasonable level. Furthermore, as you've just heard Tom review, we are working on a number of exciting initiatives targeted towards expanding our subscription base. I'll cover three topics today. (1) operational highlights. (2) financial metrics. (3) our financial guidance. Please turn to slide 10.
As Tom mentioned, in Q4 we added 221,000 total TiVo-owned gross subs. Our churn was 38,000 subs or 0.9% per month out of our total installed base of approximately 1.3 million subs at the beginning of the quarter, resulting in a net gain of 183,000 net new subscriptions. In addition, we added 173,000 net new DirecTV subs, giving us total subscription net additions of 356,000 for the quarter.
Now I would like to highlight some financial metrics for the year and quarter just ended. Please refer to slides 11 and 12. We achieved strong growth in service and tech revenue. In the year, we achieved $170.9 million in service and tech revenues, 48% higher than the $115.5 million we recorded last year. In Q4, service and tech revenue was $47 million, an increase of 37% compared Q4 of last year.
Hardware revenue from the sales of TiVo DVRs for the full year was $72.1 million, compared to $111.3 million in the previous year. Hardware revenue in Q4 was $32.3 million, down from last year. These decreases reflect lower hardware unit sales due to increased competition in the market. We generated negative margins on hardware in Q4 as the result of aggressive pricing and promotional activities that we engaged in as part of our subscription acquisition program.
Gross profit for the year was $76.7 million, a fivefold increase from the $15.8 million last year. For the quarter, we made $12.7 million gross profit, a sharp reversal from the loss of $3.7 million in the fourth quarter of last year. The power of our critical mass of subscriptions is generating significant gross profit, and we are consciously using some of that gross profit to fund subscription acquisition activity.
For fiscal 2006, operating expenses were $114.2 million, up 25% from last year and $33 million for Q4, up 23%. The increase for both the year and the quarter was attributable to a significant increase in our legal expenses in connection with ongoing patent litigation. In addition, we have made internal investments in our infrastructure to support the growth of the company as the volume and complexity of the business has changed. We have also added staff to support new initiatives and enhancements to our service.
Finally, customer service costs expanded significantly with the increase of our subscription base. Our net loss for the full year was $34.4 million, well less than half of last year's loss of $79.8 million. The Q4 loss was $19.5 million, an improvement of 42% versus the loss of $33.7 million in the fourth quarter of last year.
As Tom mentioned, this was the first full year of positive cash flow from operations. In fiscal '06 our cash flow from operations was $3.4 million versus a negative cash flow of $37.2 million a year ago. For the quarter, our cash flow from operations was $15.7 million. This positive cash flow from operations stems from our having reached a critical mass of subscription volume and demonstrates the power of our model.
Total acquisition costs or TAC for fiscal year 2006 were $94.2 million. For the quarter, our TAC was $34.8 million, down from $38.5 million last year. TAC consists of rebates, revenue share, and other payments to the channel, plus the difference between our hardware sales and our cost of hardware sales, plus our sales and marketing expenses, including advertising and various other marketing programs. When looking at our TAC, remember we have both discretionary and nondiscretionary components. We can and do change our discretionary spending to optimize our objectives.
As Tom mentioned, we spent our advertising dollars conservatively as we assess the best pricing and packaging options, particularly in the second half of the year. As you will note on slide 13, our SAC per TiVo-owned gross ad was $157 in the fourth quarter of the year compared $140 last year. As we've discussed in the past, we believe it's better to evaluate SAC over a longer time period such as a full year, as it's more representative of a full seasonal cycle. As you can see on this slide, over the past 12 months our SAC has averaged $191, which is in line with our levels over the past five quarters.
Our balance sheet continues to be in very good shape. We ended the year and quarter with approximately $104 million of cash, cash equivalents and short-term investments. We remain comfortable with this cash balance in light of our anticipated growth and cash flows going forward.
Now let me spend a moment discussing our expectations for Q1's financial performance which are summarized on slide 14. We are currently expecting service and tech revenues of $48 million to $50 million, and a net loss of $19 million to $22 million. This net loss guidance is significantly greater than the $0.9 million in Q1 of last year. Let me walk through four items I consider drivers this year-over-year trend, summarized on slide 15.
First, we expect to incur significant legal expenses in connection with ongoing patent litigation, especially in the first quarter as the EchoStar jury trial gets underway. This is a critical effort for TiVo, but it is an expensive activity which has driven significant increases in our G&A line. As a result of ongoing litigation costs, we expect our G&A expense to be greater than with the quarter just ended, a significant increase over Q1 of last year when we were not in the trial phase of this litigation.
Second, with the rollout of our new pricing plans which Tom covered in some detail, we expect to see two primary effects to our income statement. The first is that we will incur increased negative hardware margins in connection with our new, no-cost hardware plans for consumers. As a result, we expect our acquisition costs to increase.
The second relates to a potential one-time, $2.5 million to $3 million accounting expense. Let me spend a brief in a moment summarizing this. We began offering limited bundled prepayment plans last year through TiVo.com. In a prepayment plan, we received the cash up-front from consumers, which allows us to elect deferral of hardware costs over the service period. Our new zero up-front pricing plans ranging from $16.95 to $19.95 per month do not involve any consumer payment up front. As a result, we believe it is appropriate to expense hardware costs up-front for these new subscriptions. In order to be consistent, we have made a decision to change our accounting for prepayment bundled plans and write off the accumulated balance of deferred hardware costs for those devices sold to date. We believe this conservative accounting approach is the appropriate treatment in this situation.
Third, in Q1 of last year we experienced a one-time benefit to earnings related to rebates, which we do not expect to repeat in Q1 of this year. In Q1 of last year we experienced a lower than expected redemption of holiday season rebates. The effect of this was an approximately $5 million improvement to our results. This year, we were able to use the experience gathered last year to make what we believe to be more accurate estimates of holiday season rebate redemption.
Fourth, in line with the implementation of new regulations, we will begin expensing stock options in Q1. We expect a stock option expense of $3 million to $4 million per quarter. This expense is included in our guidance.
That concludes our prepared remarks. We're now ready to take your questions. In order to give as many people as possible the chance to ask questions, please limit yourself to one question at a time. The operator will be helping us to do this as well. Operator.
Thank you, sir. (Operator instructions) We'll go first to Tony Wibel of Citigroup.
Tony Wibel - Citigroup
It's one question, but it's a complicated one. Can you walk us through more details on exactly how the economics of the bundled pricing work? Meaning, I presume that you guys will carry a higher working capital outflow up-front. How do you presume to fund that? What happens after the first year when someone's commitment is up? If they elect, say, the $224 plan?
Well, when it comes to how the consumer decides to pick a plan, if he's picked a one-year, $19.95 plan or to prepay for that year at a $224 level, they'll have to make an additional election after that in terms of an ongoing one, two, or three-year commitment. Remember, in the last quarter, we basically had virtually all of our subscribers come on board with a minimum one-year commitment to service that included a penalty fee or cancellation fee in the event of early termination of that service.
We were a little bit concerned over the course of the holiday season, since there is so much gifting that the recipient of the gift, having to sign up on that basis, might resist some and in fact, it went very smoothly. We had no meaningful consumer resistance to that at all. So we do believe that people signing up on this basis where they clearly get healthy discounts by making longer commitments will work, and at the expiration of a commitment period they'll make a different election.
When it comes to funding this, clearly the notion of a zero up-front fee package where somebody is solely paying on a monthly fee, increases our subscriber acquisition cost by the amount of that additional hardware subsidy compared to our current pricing. We believe that that is something that will be attractive to a fair number of subscribers. We'll certainly keep a close eye on just how attractive that is. It tested very well.
We'll see as we implement in the marketplace, if those test results hold up. If it looks like it's something that will convert at the kind of levels that the testing suggested it would, we will look to market it aggressively. While we're not interested in dilutive sources of financing, we are considering financing options that will give us the firepower we feel we need to be able to be as aggressive as we need to, to continue to drive this type of offering forward.
Thank you. We'll go next to Lee Westerfield of Harris Nesbitt.
Lee Westerfield - Harris Nesbitt
Thank you, gentlemen. Good evening. I want to follow up with questions on the economics of the new subscriber model, or new model, if I may. This is just my very preliminary, back of the envelope economics, it looks that the pricing terms for the one year versus two year versus three year tend to encourage new buyers to choose the second or third-year option. I'm just doing it based upon what I think is a bigger discount on the second or third-year choices. Can you confirm that? Secondly, will the pricing terms also be available when you roll out your dual tuner HD box later this year?
As to the first question, yes. We are trying to incent people to sign up for longer-term plans, and in so doing providing discounts to accomplish that. We do think that the benefits that come to TiVo in terms of lower churn and greater predictability in the net present value of the sub warrant that. When it comes to, what we call our high def product later in the year, we have not yet set specific marketing or pricing arrangements for that yet. As we get closer to that timeframe we'll be looking to put that in place. This applies to our existing TiVo line of products that are in the market today.
Thank you. We'll go next to Brian Coyne of Friedman, Billings, Ramsey.
Brian Coyne - Friedman, Billings, Ramsey
Thanks for taking my call. I am glad to hear that you're taking the TiVo experience all the way to the earnings call, hearing it on the podcast later. You mentioned a little bit about, in looking at the higher MPV per sub, perhaps as much as $100. You also had talked about your SAC going up, call it $50 or $100 as well. Could you perhaps give more detail on that walk-through? Given the fact that, number one, your churn at 0.9% is obviously is pretty low. How much lower do you think that can go? Is that really going to be a big driver of the increased MPV, or where is that extra MPV boost, or the majority of the extra MPV boost coming from, particularly as your SAC is going up? Thanks.
Well, the MPV boost is coming from two places really. The reason that we've begun to see some improvement already is our greatest source of churn is in the first 30 to 60 days currently, meaning subscribers that were previously coming on board as new subscribers on a month-to-month plan, we were experiencing a lot of early churn. By people coming on board on an annual commitment plan such as this, we've clearly made some inroad in reducing that source of churn. As you begin to have people commit to longer service plans in the two and three-year range, that also is a clear opportunity for us to drive the longevity of a sub, and with it, the net present value of a sub.
If you begin to make assumptions about the longevity of a sub going beyond these service period commitments of two and three years, you get to even more impressive net present value results. Again, obviously our net present value calculation there is net of the increased SAC that these particular offers would involve.
This was really quite instructive for us to go through the various testing that we did. We did find that, while it is a higher monthly fee, there are a number of subscribers that resisted paying anything meaningful up-front, in addition to having to pay a monthly fee. So this is a customized offering there. We do believe it's a win-win. It's a win for TiVo in that we get to improve our net present value and a win for the consumer, who gets to elect a payment option, which is more comfortable for them. As I said, we hope that the testing results hold up in the marketplace and we will see how that goes.
Thank you. We'll go next to Jeff Shelton of Natexis Bleichroeder.
Jeff Shelton - Natexis Bleichroeder
Thanks. When the Comcast deal was announced last year, the indications were for a mid to late 2006 launch. On the call today you were indicating a late 2006. So just hoping you could give us an update on the integration efforts and why now we're looking for a late in the year launch.
Well, we've been saying late in the year launch for quite some time now. When we originally announced the deal, the statement of work with all the software development and testing phases and other things that went to that approach had not been worked out between TiVo and Comcast, and the schedule that accompanied such a statement of work. Once that was worked out and it was clear the various steps needed to get this to fruition, we've been consistently pointing to an end-of-year target.
Having said that, progress is coming along quite nicely. I think there was a lot of skepticism, could you actually accomplish the magic of the full TiVo experience on a generic piece of hardware that was not a TiVo box? We brought to the Consumer Electronics Show a demonstration that showed how the key features of TiVo were, in fact, now being able to be seen and implemented on a Motorola generic cable box. That is something that I think is quite a development for us; for the cable industry I think it will be an extremely positive development. It's something that makes us cheer very much for more cable boxes with DVRs in them getting out there.
I think it has generally been viewed that somehow TiVo is losing out market share, the more cable boxes with DVRs in them roll out. We look at that just the opposite way. Now that we know we, through porting software to a generic box, can turn a generic piece of cable equipment into a TiVo box, in effect, for the consumer, The more cable boxes that are out there that we can upgrade with software that, by the way, don't cost anything by way of additional capital equipment costs to the operator, or even involves a [truck roll], it's purely a software burst. The more cable boxes are out there, the greater potential universe there are for TiVo upgrades. Over time, that's exactly what we want to see.
Now, of course, we're looking to do deals beyond Comcast so that a broader part of the industry's rollout is something that truly is part of our potential universe. We find ourselves in solid discussions with other cable operators and are hopeful that we will be able to accomplish that.
Thank you. We'll go next to David Miller of Sanders, Morris, Harris.
David Miller - Sanders, Morris, Harris
Hi, good afternoon. Dave, a question for you. We know that your last day is April 14th. We're obviously sorry to see you go. We were wondering if there had been any developments with regard to your replacement.
Also with regard to your pricing changes that you mention in your prepared remarks, I take it that the deferred revenue line in the liability column of the balance sheet will disappear or will phase down over time? I'm wondering from you how you reconcile that or how you will reconcile that with adjusted EBITDA going forward. Thanks.
David, I'm going to defer the answer to the first question to Tom, who's obviously driving the process.
On the issue of Dave's replacement, first of all, we're all sorry to see Dave go. Before he does go, we will be making an announcement as to his replacement. As I've said before, the consideration of potential candidates includes both outside candidates and internal candidates for the position. So that will be an announcement that will be forthcoming in the near future.
David, can you repeat the specifics of the second part of the question?
David Miller - Sanders, Morris, Harris
Dave, can you hear me?
Yes, I can hear you. Just repeat that second part.
David Miller - Sanders, Morris, Harris
Sure, little glitch there. I take it that the deferred revenue line within the liability column of the balance sheet will disappear over time given these pricing changes, given the fact that you are phasing down the lifetime sub option. Is that correct? How do you reconcile that with adjusted EBITDA?
Right. I'm going to let Stuart handle that. In general, you'll see changes in that line over time. It may not entirely disappear. But Stuart, want to give the specifics?
Yes, David, the prepayment plans which we announced today for the one, two, and three years of service will actually be treated identically to the way the product lifetime was. They'll be amortized. Put into deferred revenue and then amortized over the one, two, or three-year commitment period. Actually the mechanics of deferred revenue won't change materially. That hopefully answers your question.
Thank you. We will go next to Richard Baldry of First Albany Capital.
Richard Baldry - First Albany Capital
Hi. Can you talk about what the implications of the new pricing plans will be for partners that are also selling hardware through channels? how they'll be able to work with these new offerings? Then maybe a clarification on the timing of HD rollout. Thanks.
Well, in terms of retail partners working with us on this, as I indicated, we're going to be putting out this pricing next week through our TiVo.com online channels. Based on the success of that, we'll look to drive something similar into retail. There are issues relating to IT logistics in terms of tying into retailers that have to be worked through in terms of our ability to implement at retail. So it will be later in the year before we would be able to do that, but it is something that we believe with the experience that we'll gain with online pricing, be able to demonstrate that particularly when it comes to that cable analog market -- and we have about a half of our customers now coming from that cable analog target, something that we've talked about before, is a major opportunity for us since TiVo really is the only choice of a DVR in that segment. That this pricing will be attractive there and to retail partners. This pricing will therefore, this type of offer will also be attractive.
When it comes to HD TV, high def, TiVo, it is something that we'll be going forward with later in the year. It will be after the mid-year point but something that I think we'll be able to get out there to take advantage of the heaviest part of the selling season. So we'll have an update as to specific timing as we move forward, but on track to be able to give us the opportunity to take part in the most important part of the year with this new product.
Thank you. We'll go next to Barton Crockett of JP Morgan.
Robert Malachi - JP Morgan
Hello, thank you. This is actually Robert Malachi for Barton. I'm just wondering to what extent you could possibly walk through your take on why the EchoStar patents aren't valid? Just to confirm, the trial set for the end of this month, does that include both the TiVo versus EchoStar and the EchoStar versus TiVo?
The EchoStar litigation is underway, so I am extremely constrained in terms of what I can say. I will tell you that a jury has been selected and we are on track to proceed to trial toward the end of this month. The issue of the validity of our patents and the infringement of them by EchoStar will be well fought and we are very focused on the opportunity of a positive outcome there for us. I would say that it is only covering our claims against EchoStar in terms of what is going to the jury trial now. The suit by EchoStar against TiVo is not now proceeding to jury.
Thank you. We'll go next to Daniel Ernst of Hudson Square Research.
Daniel Ernst - Hudson Square Research
Good evening. Thanks for taking the call. Going back to the new pricing plan, maybe if you could give us a little bit of color on what you did in the test marketing and what were some of the results of people up-front paying versus making the commitment and then going on and paying $19.95 to $16.95 a month? Overall would you characterize the impact of this higher price, potentially smaller demand but a more self-selecting group that might yield lower churn? Thanks.
Well, to just give you a little bit of color on that, we asked ourselves what is it that is getting in the way of increased sales of TiVo? One of the things we looked at was the depth of messaging and whether or not a longer message that answered the question, why do I need TiVo in my life, if that was something that would help move the dial. And in fact, we did see that as we went to longer messages, in fact, two-minute commercials that went into more detail the benefits of TiVo and in fact even half-hour infomercials, we saw the result even more so. The longer the explanation, the more detailed the discussion of what benefits TiVo has, the greater the likelihood in a direct response context for potential customers to come forward and say "I want the product."
We then, though, saw with that increased traffic we weren't getting the conversion results to actual sales that we hoped for. As we dug into that, what we found was as people got interested in the product and wanted to become customers, a healthy number were getting turned off by having to pay up-front for the product and then have a monthly fee on top of it.
So we went back and probed that further, and we found that there were both customers who hated the idea of ever having another monthly bill, which is why we came up with a way to package these multi-year commitments with the box, with a one-time-only payment; and at the same time, there were people who, as I said, hated the hybrid nature of the offer and didn't want to pay anything up-front but were quite comfortable with a monthly charge.
In fact what we saw was not an increase of 20%, 30% or something like that, we saw much more substantial conversion rates among subscribers who were getting this kind of offer and this kind of opportunity to become subscribers when a monthly-only fee was the available choice. We came back into the market a few times to test this different way, and the results were quite consistent. Enough to give us a sense that in the online context, at least, we had a very promising configuration that we could put in place that would help drive additional sales.
I'll note that even without this, our online sales are now, for the last year and for the last quarter, about 34% of our total sales. So our online sales are a growing part of our overall sales mix and by far the most efficient part of our sales mix. We didn't find at all that this was simply a lower response among a self-selecting group who might be interested in it. It looked like it was something that could create higher volume and therefore, greater opportunity for growth than the current offers on the table.
Thank you. We'll go next to Chris Rowen of SunTrust.
Chris Rowen - SunTrust
Hi, thanks. When you said that 49% of your customers in the fourth quarter were stand-alone, were analog cable subs, is that 49% of your stand-alone subs or 49% of the total?
That's 49% of our stand-alone subs. Our total subs includes the DirecTV subs, which, of course are digital satellite subs. Of the 183,000 number, 49% were cable analog subscribers.
Thank you. We'll go next to Gordon Hodge of Thomas Weisel Partners.
Lloyd - Thomas Weisel Partners
Hey, it's Lloyd in for Gordon. I was wondering if you guys have a sense yet on how Comcast plans to position the TiVo option versus its generic DVR? What reach will you be able to achieve? What features such as portability, will they be supporting?
Well, it's not for me to speak as to Comcast's feature set or Comcast's marketing. We are now highly focused on the marketing discussion with them. I will say that our objectives are very much aligned. The opportunity is one that we see as quite substantial. The focus of that will obviously become more intense as specific markets, later in the year, get prioritized for purposes of rollouts. We do feel that where we are here gives Comcast the opportunity to say that truly the best of TiVo that's ever been out in the market -- and more -- is available. We think that they will heavily take advantage of the feature sets that we're making available to them.
Thank you. We'll go next to Robert Hailey of Gabelli and Company.
Robert Hailey - Gabelli and Company
Hi, thanks for the question. I wanted to ask about your advertising platform. Back in November there was an announcement about advertising search. I was just wondering what the update on that was? If it's been rolled out, what are the interests you're seeing from advertisers and usage, if it's rolled out? To what extent will that feature be included in the Comcast rollout, as well?
The advertising search feature has not been rolled out yet. We have gotten considerable interest from advertisers. It will be rolled out in the not-too-distant future. Comcast was part of that initial announcement and is quite interested in that feature, as they are in our overall advertising solution.
I will say that we now have a number of advertising solutions that we make available to advertisers. We're feeling quite good about the number of repeat customers that we are getting. Initially there were people coming into TiVo as advertisers who felt that it was an interesting technology to learn something from. I think we are seeing more and more, at very impressive rates, finding that the results of their advertising campaign exceeded their expectations and that we are getting recurring business from advertisers that gives us a true sense that this is a solid growth opportunity for us.
We have pointed to the fact before that the advertising elements are ones that were a key feature of Comcast's desire to enter into the deal with TiVo. I've heard Brian Roberts at major industry gatherings pointing to the TiVo interactive advertising solution as something they are heavily focused on as an advertising priority, as they look to drive that part of the business. We believe that we are able now to work with advertisers to create a level of direct response results that nicely exceed other traditional forms of direct response advertising, which is very much what we wanted to see.
Thank you. We'll go next to Rob Sanderson of American Tech Research.
Jeff Schreiner - American Tech Research
This is Jeff Schreiner in for Rob. We were wondering, gentlemen, if you could talk in general about how a positive outcome in the current litigation with Dish, what that could mean? Then obviously because it's an infringement trial, if you were to be awarded infringement, would treble damages be awarded in that case? How would these damages be determined?
Well, I'm really constrained in terms of what I can talk about that on that front. I would say obviously a victory there is something that we think will very much enhance our current position in the marketplace. We are conducting our business as if the trial isn't taking place and doing everything we need to do to grow the business.
Based on the outcome of that trial, if we are victorious, we have plenty of opportunity to proceed with the advantages that that gives us, and as I will note, there is plenty of intellectual property that we own that is not at issue at that trial. In terms of damages, of course, that's all part of the current trial process and will be decided as part this process.
Thank you. We'll go next to Michael Kelman of Susquehanna financial.
Michael Kelman - Susquehanna Financial
Thanks. I have a question on first quarter guidance. Does Q1 guidance assume a meaningful reduction in DirecTV net adds or some type of change in ARPU? Because when you work through the numbers based off of your year-end subtotals, it appears that either your service and technology revenue guidance is light or you're assuming some type of reduction in your stand-alone subscribers.
Well, I would say we are not expecting a reduction in our stand-alone subscribers. We are, as I said, making progress even with our already solid churn rates with reduction of those churn rates as we continue to bring people on at the kind of levels that we are.
The DirecTV situation is one where, clearly we don't expect to have the kind of growth that we have experienced with DirecTV in this quarter or previous quarters as they increasingly move to drive their sales to their alternative box. Beyond that, I don't think I can guide you specifically as to our stand-alone number to help you make that calculation precisely. Those are the overall dynamics.
Thank you. We'll go next to J.D. Abouchar of Pacific Edge Investments.
J.D. Abouchar - Pacific Edge Investments
Hi. Thanks for taking my question. Could you give me some clarification on the comments you made about considering financing options? Is that financing the individual boxes for the consumers? Or based on if you see a great uptake on this new plan you'll raise more money so that you can more aggressively market the service?
More of the latter than the former. I didn't want to suggest any particular type of financing that we are considering other than the fact that it would not be equity financing of a dilutive nature. We are looking at ways that we could have a source of funds available to us in the event this marketing approach looks like it is worthy of really putting our foot on the accelerator and stepping up. We have had a conversation with a number of financing sources, and to the extent we decide to put in place any of those arrangements, we'll have more to say at that time.
Thank you. We'll go next to John Sheridan of Deutsche Bank.
John Sheridan - Deutsche Bank
How you doing?
John Sheridan - Deutsche Bank
Good. How are you? I wanted to ask you about -- I don't know if you are going to give it or if you can -- but you said you did $15 million in cash flow of Q4. Can you talk about Q1 a little bit in terms of cash flow?
Well, I will say this. That on the subject of cash flow, generally, we are feeling that the achievement of our first cash flow positive year is quite significant. We think that there is a lot of focus on the loss side of the equation driven by the accounting conventions of taking the up-front hit of the significant subsidies that we have in our marketing of the stand-alone units. When you consider our current mix of subs in terms of those coming in with up-front payments or some kind of bundled payment, and the monthly subscribers, that at the current level of subs, the 500,000 level of subs overall for the year, we have a cash flow positive model going, which I don't think a lot of people recognize. That we are adding on a gross basis 500,000 subs and covering all the operating expenses of this business and the associated marketing expenses of those 500,000 subs. We have put together a cash flow positive model under the current mix.
Now that mix could change some based on how the new offers succeed or not in the marketplace in terms of how many people may elect to purchase on an all up-front basis versus the number of people that may find the zero up-front and only a payment on a monthly basis attractive. So we'll have to assess that new mix under the new pricing.
I will say the general comment that the reason that we are cash flow positive for a year has a lot to do with the heavy volume of sales that come in at the latter part of the year. So I'm not looking to give any type of quarterly or annual guidance when it comes to cash flow from operations, just a statement as to how the current model worked, that we'll have to assess that model in light of new pricing. That cash flow positive was generally a function of the higher volume of sales that come toward the latter part of the year.
Thank you. We'll return to Tony Wibel of Citigroup.
Tony Wibel - Citigroup
Thanks. I was hoping you could go over the economics with the retailers. Is the commission split that you would typically get changing now that you have a shift in the model?
Well, as I said, the retail aspects the new pricing plan are not ones that we are initiating yet. We are in discussions with retailers about the various logistics of how to accomplish implementation of a similar type of offer. Of course those discussions would include how to maintain the incentives for retailers that are currently in place.
At this point since how we do that, when we do that, and the logistics of accomplishing that are things that we will examine further as we get a little more read as to how these offers do in the marketplace from our direct TiVo.com sources.
Thank you, sir. At this time I'd like to turn the conference back over to Mr. Tom Rogers for any additional or closing remarks.
Thank you very much, everybody. I just want to summarize what I think is the essence of what this quarter represented for us. It was our second-best quarter ever in adding stand-alone subs. It was our first year of cash flow positive results from operations. That focus on cash flow, again, paints a very different picture of the business model than the loss analysis does. The cable development work that we've been talking about has now been proven, which means we are rooting for more cable boxes getting out there, something I don't think is well understood.
We have announced a lot of new features that means even the bears have a tough time not admitting we are by far best of breed, and you're seeing those admissions increasingly in analysts' reports. We are the only platform endorsed by major family TV groups now, which had a lot to do with driving the Radio Shack distribution announcement, which we're quite proud of.
Again, almost one half of our new subs are cable analog subscribers, a target which we indicated we wanted to go at heavily, and we think is an important one that allows our new pricing initiative to again give us an ability to further penetrate that 35 to 40 million home market.
We had our best online sales quarter ever with 34% of our sales, demonstrating greatly improved sales efficiency. We do have 4.4 million subscribers, and our already impressive churn rate is down even further in the quarter. Our net loss improved by 57%. Our revenue for the year is up 48%. The patent trial is now going forward. And we have more announcements to come. I really have to say that even the TiVo skeptics have to be able to find something in that list that makes them think twice.
As a final note, I want to take a moment it thank Dave Courtney for his years of dedicated service to TiVo, both as CFO and his operational capacities. He's done 26 consecutive calls like this. I am sure all of you will really miss him on these calls. And both as a board member and as CEO, I have greatly valued working with Dave. He will be around until the middle of April, which gives each of you time to still have a few more cracks at him. But with that, thanks, Dave. Thanks all of you for joining us.
Thank you for your participation. That does conclude today's conference, you may disconnect at this time.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: firstname.lastname@example.org. Thank you!