TiVo Inc. (NASDAQ:TIVO)
F1Q09 Earnings Call
May 28, 2008 5:00 pm ET
Thomas S. Rogers - President, Chief Executive Officer, Director
Cal R. Hoagland - Interim Chief Financial Officer
Derrick Nueman - Director, Investor Relations
Matt Zinn – General Counsel
Alan Gould - Natexis Bleichroeder
Tony Wibel - Citigroup
Barton Crockett - J.P. Morgan Chase
Brian Coyne - Friedman Billings Ramsey
Daniel Ernst – Soleil Hudson Square
Mike Olson – Piper Jaffray
Lee Westerfield - BMO Capital
David Morris – SMH Capital
Ingrid Ebeling - JMP Securities
Todd Mitchell - Kaufman Brothers
Tuna Amobi - Standard & Poor's
Welcome to the TiVo first quarter fiscal 2009 earnings call. (Operator Instructions) The speaker’s for today’s conference are going to be Tom Rogers, Cal Hoagland and Derrick Neuman. At this time I’d like to turn the conference over to Derrick Neuman.
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 ending April 31, 2008, which is our first quarter fiscal year 2009.
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, we will post a recording of this call later today on the Investor Relations website. The prepared remarks today will last about 30 minutes and will be followed by a question-and-answer session.
Please note that our discussion today includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to, among other things, TiVo's future business, profitability and financial performance and guidance, distribution of the TiVo service domestically and internationally and TiVo’s ongoing litigation with EchoStar.
You can identify these statements by the use of terminology such as guidance, believe or similar forward-looking statements. 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 vary materially from forward-looking statements. Factors that may cause actual results to differ materially include those described under “Risk Factors” in our publicly filed reports with the SEC including our latest 10-K. Any forward-looking statements made on this call reflect analysis as of today and we have no plan or duty to update them.
Additionally, some of the metrics and financial information provided in today’s call include non-GAAP measures. Please see our first quarter fiscal year 2009 key metric trend sheet for a reconciliation of these items.
With that I will now turn over the call to Tom Rogers.
I need to start on a very sad note today because our esteemed Board member Chuck Fruit died suddenly yesterday. Chuck has been an invaluable Board member for the last four years. Among many other things he was intimately involved in establishing all of our key advertising agency relationships. His willingness to put in time well beyond what was expected of most Board members to help advance the cause of TiVo in the advertising world is something I have always been immensely grateful for.
Chuck led the marketing efforts of the Coca-Cola Company for a number of years and was considered by his colleague’s one of the real “giants” of the marketing world. We were incredibly lucky to have Chuck serve us on our Board and I will miss his wise counsel and guidance very, very much. He deserves far greater tribute than this but I felt Chuck’s accomplishments with TiVo deserved to lead today. As difficult a transition as this is, Chuck would now want me to say, “Onto much better news.”
We began fiscal 2009 on a solid note delivering a record quarter for adjusted EBITDA and net income. We are very pleased with these results as we are well on our way to our first profitable year on an adjusted EBITDA basis. Before I get into more detail on the quarter let me take a step back and provide you with some perspective on where TiVo is positioned within the context of the macro trends currently defining and impacting the television landscape.
First, there continues to be explosive DVR growth with 50% penetration expected in the next 3-4 years and that doesn’t even begin to address the international opportunity. TiVo is at the center of opportunities both domestically and internationally through our mass distribution deals and it is because we offer the only branded DVR solution and the best television viewing experience.
Second, as DVR usage grows commercial avoidance does too. This trend is having a significant impact on the $60 billion television advertising industry and TiVo is providing critical solutions through its unique advertising and audience research capabilities. We have become a friend of the advertiser, not the foe.
Third, consumption of television is changing drastically with a vastly expanding choice available to the consumer. With any movie, video or song now deliverable via broadband going way beyond traditional cable, satellite and broadcast delivered TV. TiVo is the agent of change delivering this content to the television and we are well beyond the digital video recorder and have become the digital video retriever playing a key role in facilitating broadband content directly to the television.
Fourth, this additional choice we are making available has already created millions of content options through TiVo which through our expanding content partnerships will continue to grow exponentially. With that degree of choice there is a need for television-based search that gives people the ability to manage and easily find whatever it is they want to see whenever they want to see it. This goes to the essence of TiVo’s distinctive viewer experience. We know that consumers need to be able to find content using an easy and simple search and user interface and TiVo continues to develop simple approaches which will be critical to consumers navigating this world of almost infinite choice.
Fifth, the TV is not going away as the center of entertainment in the household given the overall HD trend and the large expenditures consumers are making on big, flat screen, HDTV sets. Thirty-two million HD sets are expected to be sold this year. We seek to drive recognition that the full potential of the TV set is not realized without TiVo and we are moving to more aggressively bundle TiVo with HDTV sales.
Sixth, there has been a surge of announcements introducing specialty boxes that deliver partial movie libraries or other video content. With this array of digital and home networking box choices, device clutter that overwhelms the consumer is clearly developing as a major issue. Moreover, we do not believe that other devices which deliver only some portion of video choice solve this issue. TiVo stands for a single, complete solution that is one box, one remote, one user interface and one-stop shop for all content choice be it traditional TV viewing or the entire world of broadband delivered options.
Finally, we are highly cognizant of what happened to the music business with the total undermining of its business model. As TiVo helps to shape these television trends we look to assure that our advertising and audience research approach will play a significant role in developing the business model for television going forward; one that will continue to make the television business financially strong. As we have said before, we are creating the ultimate television dream machine that will give the viewer any content they want, whenever they want it whether by recording and retrieving with great ease and simplicity. TiVo becomes your personal guide to the world of infinite television choice.
Now let’s get into the details of the quarter. We continue to improve our financial profile as net income was a record $3.6 million while adjusted EBITDA was $11.1 million, roughly $4 million better than the high end of our adjusted EBITDA guidance range.
We continue to effectively manage our subscription acquisition costs in the TiVo owned business so that we are able to achieve our financial goals for the year and so that the stand-alone business doesn’t cloud enthusiasm for our other growth drivers.
Additionally, our TiVo owned churn fell to 1.3% this quarter, down from 1.5% in the prior quarter and we’ll continue to focus on ways to reduce churn. What is important is that we are improving our financial position while also making significant progress on bringing to reality our mass distribution strategy and also protecting our intellectual property.
Let me take a few moments to discuss each of these.
In terms of our litigation with EchoStar and defending our intellectual property the United States Court of Appeals for the Federal Circuit unanimously upheld the District Court’s ruling that EchoStar had infringed on our patent and more recently denied EchoStar’s petition for a re-hearing en banc. We are pleased the Federal Circuit upheld the ruling for a full award of damages and an Order for the injunction to be reinstated.
We have informed the District Court that based on what we have been provided by EchoStar to date we believe that EchoStar’s modified software does not avoid infringement. We are pleased that the District Court is moving forward with respect to the remaining issues and has scheduled a status conference later this week. We look forward to bringing this case to a final resolution and the full value of our intellectual property being realized.
On the mass distribution front, our service on Comcast has been available in Comcast New England region since early this year. We are preparing to make it available in a new New England state beyond Massachusetts and New Hampshire very soon. Comcast and TiVo are pleased with the rollout so far and we expect Comcast will expand their marketing efforts this summer as the rollout continues in the New England region.
Additionally, Comcast continues to be very excited about the roll that TiVo is playing in putting Comcast at the cutting edge of television. Additionally, the TiVo service on Cox, which is currently in trial, is on track for market launch in New England market later this year.
We have also had some interesting developments when it comes to the cable industry. Working closely with the National Cable and Television Association we are in the process of creating a solution which will allow TiVo consumers to continue to seamlessly receive programs on systems utilizing switch digital video technology. We have also worked very closely with leading MSO’s such as Time Warner, Cox and Comcast along with cable labs on this process.
Notably, Cisco and Motorola displayed switch digital tuning adapters at the NCTA Cable show last week. These devices are currently undergoing verification and qualification with cable labs so that they can then be deployed in the small number of systems where limited numbers of lightly watched program channels are provided now on a switch digital basis.
Internationally we continue to gain momentum as TiVo is now available in Canada, Mexico and Taiwan. Importantly we expect to be launching with seven in Australia prior to the Olympics with the first boxes arriving in late July. This will be a model for broadcasters across the globe on how to protect their position. We are garnering a tremendous amount of interest in other geographies and we expect a number of international broadcasters, cable companies, satellite companies and our telecom companies to look to TiVo for a DVR solution. We believe that international fields represent a significant opportunity for us to increase our sub base.
Going back to our TiVo stand-alone business our commitment to focus on efficient marketing spend has been successful, validated by our considerable decline in quarterly subscription acquisition costs. Our SAC this quarter was $116 which is a $132 improvement over the same period last year and our lowest quarterly SAC figure since calendar year 2005. Our success in this area played a large role in terms of driving our significant EBITDA improvement.
As we alluded to in our last call we are also working with leading retailers and consumer electronic manufacturers to bundle TiVo with HDTV sales. Several of the bundling programs we ran during the quarter were promising, increasing sales for both TiVo and the consumer electronics manufacturer.
For example, we ran a bundle in conjunction with Amazon.com and Mitsubishi that increased not only TiVo sales but Mitsubishi’s as well. Importantly, the acquisition costs associated with these programs are efficient marketing expenditures. We plan to expand these bundling efforts and are hopeful that our early success will translate into large-scale success over time.
We also continue to weave our way into the fabric of the media industry. Older established media are continuing to partner with us to find strategic answers to their current predicaments. A new example is our recently announced partnership with the Chicago Tribune which allows TiVo subscribers to download the recommendations of the newspaper’s critics directly to their televisions so that these recommendations are waiting there when the TV set is turned on. This can be a great way to make a newspaper’s TV section that has long existed far more valuable to the viewer by guaranteeing the newspaper’s TV choices are automatically recorded and delivered to the TV set. Significantly, the Chicago Tribune’s TV section will promote TiVo and make it clear how new sub’s can sign up. We applaud Chicago Tribune’s leadership in showing the way for others in the newspaper industry.
Through bundling programs with retailers, marketing programs with consumer electronics companies and new approaches with content and media companies like the Chicago Tribune we are increasingly entering into strategic agreements that enable the marketing resource of others to accelerate our subscription growth.
Additionally, as many of you know, over the last six months we have been offering to our sub base a product lifetime option with some success. Because of this we have made the decision to re-introduce the option for all potential customers. We recognize that there are some customers that like the idea of paying for service up front and we like the concept of up-front cash with lower churn risk. Currently we are offering product lifetime at $399 for new customers and at $299 for our current pays. As we have indicated before, TiVo HD is priced in a way that involves a far smaller subsidy of hardware giving us greater flexibility in our service pricing strategies.
In terms of our efforts to more efficiently market TiVo, our TiVo.com website has been re-launched. The new and improved website is designed to more simply and directly enable consumers to understand why TiVo is better, different, easier and cheaper. In concert with this re-launch we initiated the first phase of our social networking application on Facebook. We now link TiVo and non-TiVo users on the web through Facebook to discuss shows and episodes with their circle of friends, further distinguishing TiVo’s feature set in a significantly meaningful way by making it part of the world of social networking.
With that, let me provide you some detail on our broadband strategy and how we continue to add more choice to our offering. Today we announced an exciting deal with Disney that will bring Disney content directly to TiVo enabling TiVo subs to get content now from all the major movie studios.
The deal we announced with YouTube is expected to launch in the next few months. This deal is meaningful because every month millions of videos are available on YouTube and hundreds of thousands of videos are uploaded. Upon launch of the TiVo/YouTube service broadband connected TiVo subscribers will have literally millions of videos available per month with the ability to search, browse and watch them directly on their television sets.
Our broadband and content features are just one way TiVo distinguishes itself from basic DVR’s and it is gratifying that we continue to get recognition not only from our subs but from the industry. TiVo was the only DVR included in CNet’s Best of 2007 List and Gadget recently named TiVo HD the Best Home Entertainment Device of the Year and Wired gave us its Best of Test in the DVR category. These are just some of the accolades that our service has received recently.
What we will be working harder for now as we fill out our “anything you want whenever you want it” feature set is the recognition that TiVo has moved way beyond a DVR to becoming a critical entertainment hub in the home. One of the reasons that we have confidence in the stand-alone product offering going forward beyond TiVo being recognized as the Best of Breed DVR is that we believe in TiVo’s ability to be recognized by viewers as the best way to manage all digital entertainment of any and all kinds coming through the TV set. However, we will continue to be cautious about how we utilize our marketing resources to drive acceptance of TiVo in this regard in the marketplace.
In conclusion, we are off to a great start in fiscal 2009. We are posting strong profitability metrics, we are making significant progress in mass distribution and we are successfully protecting our valuable intellectual property. On top of this TiVo is leading the charge on the many macro trends defining the television landscape. When you pull all this together we believe that we have created a solid foundation for significant growth.
With that let me turn it over to Cal.
As Tom mentioned we are pleased with our financial performance this past quarter. We posted net income of $3.6 million which is the highest in the company’s history and adjusted EBITDA of $11.1 million, again the highest in the company’s history. We believe we are off to a great start this fiscal year.
Please note that historically our first fiscal quarter has been our strongest financial performing quarter of the fiscal year. Before I get into our financial results let me quickly remind you that last quarter we made a change in accounting estimates that impacted how we recognize revenue for product lifetime subscriptions.
As you recall, we and our auditors came to the conclusion that our product lifetime subs are keeping the TiVo service longer than we originally estimated. As a result, we increased the estimated life and the revenue amortization life for subs sold prior to November 1, 2007 from 48 months to 54 months. This change in the accounting estimate reduced each of our Q1 service and technology revenues, net income and adjusted EBITDA by $1.6 million.
With that now let me provide some highlights from our first fiscal quarter operating results. Service and technology revenues were $54.9 million, the high end of our expectations. Of that service revenues were $38.4 million which is down from the first fiscal quarter a year ago. This was impacted by the increased estimated life and revenue amortization period for the product lifetime subs reducing revenue by $1.6 million as well as product lifetime subs becoming fully amortized, thereby no longer contributing revenue and the continued decreases in our DirecTV sub base.
Technology revenues were $6.4 million, down slightly from last quarter and up about $2.5 million from the first fiscal quarter of last year. Excluding about $800,000 in expenses related to stock based compensation cost of service and technology revenues were about $14.3 million for the quarter which concluded about $11 million related to the cost of service revenues. 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 $4.4 million. This consists of hardware revenue offset by related costs and expenses including rebates, revenue share, inventory reserves and other retail channel costs and expenses. Contributing to the hardware gross loss was $1.7 million related to hardware sold which benefited from the utilization of $1.6 million of inventory reserve and $2.7 million related to rebates, revenue share and other expenses associated with the retail channel.
Operating expenses excluding stock based compensation of $5.5 million as a percentage of service and technology revenues were as follows: Sales and marketing 12%, which decreased sequentially from 24% of service and technology revenues in the prior quarter and from 18% in the first quarter of last year. This decrease was driven by lower marketing expenditures and the portion of sales and marketing expenses related to subscription acquisition costs represented 2% of our service and technology revenues. Research and development was 23% of service and technology revenues and G&A was 15%.
With our aggregate stock based compensation expense of $5.5 million net income was $3.6 and that includes a combined positive $0.5 million net interest income offset by income tax expense. This compares to our guidance of a net loss of $1 million to $3 million for the first quarter of this year. Our net income per share was $0.04 for the first quarter this fiscal year compared to a net income of $0.01 per share for the first fiscal quarter of last year. Our fully diluted net income per share calculation for the first quarter of this fiscal year was based on 102.7 million weighted average shares.
Our adjusted EBITDA for the first fiscal quarter of this year was $11.1 million and this compares to adjusted EBITDA of a positive $6.7 million in the year ago first fiscal quarter and to our adjusted EBITDA guidance of positive $5 million to $7 million. In addition to stock based compensation and that positive $0.5 million net interest income offset by income taxes our adjusted EBITDA calculation for the first fiscal quarter of 2009 adjusts for $2.6 million depreciation and amortization in the quarter.
The better than anticipated net income and adjusted EBITDA was driven by lower than expected operating expenses primarily R&D and marketing. As Tom mentioned we are increasingly looking to third parties to bolster our marketing resources. Additionally, both our first fiscal quarter net income and adjusted EBITDA included the benefit from the utilization of $1.6 million of the inventory reserve. We also expect a small benefit in the second quarter.
Our inventory reserve for standard definition product now stands at $6.9 million at the end of April of this year.
Finally, we ended the first fiscal quarter with about $98.9 million in combined cash. That is cash, cash equivalents plus short-term and long-term investments. Please note that we reclassified 4.3 of auction rate securities into long-term investments from short-term investments. Additionally our cash position does not include damages plus interest aggregating over $100 million related to the EchoStar litigation that we anticipate receiving later this year.
Now turning to our key pricing and volume metrics. Our TiVo owned gross additions were 48,000. While our gross ads decreased 15% compared to the first fiscal quarter last year this is an improvement compared to the trends we have seen over the last several quarters. Churn was 1.3% per month and that is down from 1.5% per month last quarter yet up from the first fiscal quarter a year ago. The sequential improvement was driven by our efforts to reduce our churn and due to seasonality. We will continue to focus on managing churn and better understanding the upgrade cycle to HD products.
On a net basis, our TiVo owned subscriptions decreased by 17,000 in the first fiscal quarter and our TiVo owned subscription base that we had at the end of the quarter ended April 2008 was approximately 1.73 million. Our MSO broadcaster sub-base which includes DirecTV, Comcast, Cablevision Mexico and other mass distribution relationships declined by 128,000 sequentially from the fourth fiscal quarter.
During the quarter we saw a slight decrease in DTV churn and an increase in Comcast and international deployment rates. It should be noted we expect Comcast deployment rates will benefit going forward from remote downloading and the full breadth of Comcast marketing.
Our overall sub-base now stands at approximately 3.8 million subs at the end of April of this year. For the first quarter of this year our TiVo owned average revenue per user was approximately $8.20. We saw a large year-over-year decrease in the [inaudible] due to a reduction in lifetime deferred revenue and due to the longer amortization period of product lifetime subs. At the end of the quarter we had approximately 163,000 product lifetime subs that had reached the end of their amortization period that we use to recognize lifetime revenue and that is down slightly from last quarter due to lifetime churn. This represents 24% of our total current product lifetime subscription base which stands at 677,000 subscriptions.
Additionally, as Tom noted we have reintroduced our product lifetime subscriptions broadly. We believe that this option will appeal to some customers and since we have moved from hardware subsidies and continue to focus on our SAC reduction we believe we have more flexibility to offer this type of pricing and as Tom said we like the up-front cash and the lower churn risk from product lifetime subs.
Let’s take a look at our subscription acquisition costs. Our total acquisition costs were $5.6 million in the first quarter of this year less than half of what we had in the first quarter of last fiscal year. Our SAC in the first quarter of this fiscal year was $116, roughly $132 improvement compared to the first quarter of last year. Please note that our SAC in the first quarter of this year was the lowest quarterly SAC in the last three years.
The decrease on a year-over-year basis is due to decreased marketing expenditures and a lower box subsidy. We also benefited from the utilization of $1.6 million of the inventory reserve. On a trailing 12-month basis our SAC was $272 declining from the second quarter sequentially but up year-over-year as it includes about $4.9 million in net inventory charges we booked this past year and our increased marketing spend in last year’s second fiscal quarter.
Looking forward we anticipate that SAC will continue to decrease on a trailing 12-month basis as we benefit from less hardware subsidy and lower marketing spend.
Now let’s turn to the guidance for the second quarter of fiscal 2009. We expect that service and technology revenues to range between $53 and $55 million. We also anticipate that we will continue to see declines from the DirecTV sub-base revenue. We currently expect our 2009 second fiscal quarter adjusted EBITDA results to be in a range of a positive $3 to $5 million and we expect a net loss in the range of $2-4 million. It should be noted that our historical and our adjusted EBITDA and net income loss results are seasonal in nature with our first fiscal quarter being our strongest fiscal quarter. This year should be not different with respect to seasonality.
To wrap it up we are extremely pleased about our record adjusted EBITDA and net income in the first fiscal quarter of 2009. We believe we are well on our way to our first profitable year on an adjusted EBITDA basis for fiscal 2009 and we will continue to be prudent with our investments and our subscription acquisition costs as we execute our mass distribution, international, advertising and other growth opportunities and ride the macro television trends that Tom laid out earlier in the call.
This concludes our remarks. We’d like to thank you for your time and we’d like to now turn it over for your questions.
(Operator Instructions) Your first question comes from Alan Gould - Natexis Bleichroeder.
Alan Gould - Natexis Bleichroeder
On that SAC you said it will continue to go down on a trailing 12-month basis but this is a heck of a drop. Less than half of what it was a year ago. I haven’t calculated but it’s $1.6 million divided by $48,000 how much you benefited from that reserve. How much is that reserve going to benefit you in the second quarter? Do you see a number like 116 as a full-year number or would that be too low?
Well we’re not putting out a projection on what SAC will be going forward. I will say that we are going to continue to manage it down. The mix of HD product as it increases, as it has, means that we are dealing with hardware that has far lower subsidy attached to it and therefore that is a major contributor to that decline. The first quarter tends to be a lower quarter in terms of overall advertising and marketing expenditure.
Second quarter with Mother’s Day, Father’s Day, graduation, etc. tends to be an increased quarter in terms of marketing spend so we are not pointing to the number that was achieved this quarter as necessarily being a number we will continue to achieve on an ongoing basis.
But we are clearly continuing to manage that number down. We think we’ve gotten more efficient in terms of driving our subs. We have put together a totally new experience on TiVo.com which we think contributes to that efficiency and we are looking to increasingly work with third parties who make their own marketing expenditures on behalf of TiVo which also obviously helps keep our own expenditures down.
Cal did you have a comment on the reserve issue?
The primary driver of the reduced SAC this quarter was the lower advertising spend. We did have that benefit of the inventory reserve and we do anticipate we’ll have a small benefit going forward. As Tom said we are having a shift towards a higher portion of HD product.
The next question comes from Tony Wibel – Citigroup.
Tony Wibel - Citigroup
I was hoping you could comment a little on the Disney deal. What properties are included with that? Is it just the movies or do you have access to any kind of ESPN and other content? Also would we be going a little bit too far to be hopeful that the Disney deal could help out on the advertising front at some point since you have the other two major networks?
Well this deal is a deal with the Disney studios. It doesn’t go to any other Disney properties. It does include the full repertoire of Disney film product that is available digitally, which is both new releases and library product that is available digitally and we’ll have all of it available to us. We obviously have discussions going with all major networks and players on the television front but I don’t want to make any comment about how this deal may or may not relate to any of that.
The next question comes from Barton Crockett - J.P. Morgan Chase.
Barton Crockett - J.P. Morgan Chase
I wanted to ask about situation with EchoStar. You probably cant say very much but can you give us any sense of whether there has been any opening to discussions with them about settling in terms of them being open to talking to you or the judge suggesting that you get together? Is there anything it seems that it has been pretty radio silent in terms of communication between the two as you go through the legal process.
Unfortunately we can’t really comment on that. That is confidential.
Barton Crockett - J.P. Morgan Chase
Can I get another question if that is a no? On the net on the stand-alone service is there anything we can point to over the next few quarters that could get us back into a growth situation? I know you don’t like to see it but is there anything we can point to that would make us to think maybe we could expect it?
I don’t want to make a projection in that regard in terms of growth. It is certainly our goal and it is certainly what we are working towards. I would say that the most significant activity that we are working on that we think will help boost our stand-alone sales is relationships with third parties some of which we began to test this last quarter with bundling with HDTV set sales, working either directly with a consumer electronics manufacturer or retailers on the bundling of the TiVo sales and potentially content partners who have particular reasons to see TiVo sales driven.
On a small note there I’ll mention that the Chicago Tribune deal that we announced today which we think can be a model for other newspapers tying their television sections into TiVo will include the promotion of TiVo for new subscribers. So this is how you can get the critics’ recommendations delivered directly to your television set.
So we are exploring all kinds of bundling and third party promotion techniques which we think can advance our growth and in some cases have the potential to substantially drive our growth without having to directly look to our own subscriber acquisition expenditures as a basis for doing that.
Just going back to Tony’s question one second on the Disney front I just did want to make clear that with that Disney deal we do now have access to all the major studio products for purposes of our movie download capability and we thought that was a critical piece with Disney to fill out.
The next question comes from Brian Coyne - Friedman Billings Ramsey.
Brian Coyne - Friedman Billings Ramsey
I wanted to follow-up on actually on the prior question where you talked a little bit about third party relationships as one of the key elements that you think could lead to some growth in the stand-alone service. At the same time you have also obviously re-introduced the lifetime subscription option.
Now again I was wondering if you could just comment a bit more on your strategy around this? Is there something that you saw in the market that really prompted you to bring it back? Do you think you settled finally on the right mix of offerings on that stand-alone service to meet your goal which looks like flat to maybe very modest growth?
I would say that the offering of lifetime which is something we had re-introduced to our existing base is now something we will make available to the new subscribers as well. That is one piece of a broader marketing strategy in terms of driving the stand-alone business forward while at the same time reducing our overall marketing expenditures against the stand-alone business.
The reason for the lifetime re-introduction really was that we think we have more flexibility on how we price the service offering as we subsidize less, have less need to recoup over a longer period of time with monthly sub revenue which would otherwise be the key way that those subs might come on board. Because of the lower subsidy we can take one up-front cash payment between the TiVo hardware and the TiVo service and still look at the valuation that we get on a per-sub basis and look at it attractively. I think it is one more element of flexibility that we offer monthly payments, annual or multi-year payments and lifetime payment.
The stand-alone marketing issue we really are approaching more broadly now and one of the reasons for our cautiousness in terms of expenditure at this particular point is we do believe it is very important that TiVo be viewed as more than a DVR, which it is. But more than the DVR attributes have not really been fully dolled out quite yet. We’re getting there. We’re getting closer but we’re not quite there yet.
You can pretty much get any song you want through TiVo with what we have introduced and announced today on Disney increasingly being able to look at it as an all-purpose movie service and the video attributes once we introduce YouTube and some other content players that we are in discussions with we think really does build towards this any song, any video, any movie, traditional television, whether you are recording it or retrieving it.
You can begin to create a value proposition here which depending on the pricing plan you get makes TiVo look like a pretty good deal against cable or satellite DVR just when looking at it as a DVR. When you add to it this entertainment hub in the home, one stop shop for content and look against what the box price is for those offerings where this is an all-in-one solution the value proposition begins to look that much clearer.
We think that is something that will have viral legs from a marketing point of view, something we think we can officially market to but we are also hesitant to move too aggressively in terms of marketing on that front until all the attributes of that have been fully built out and are readily available to customers.
The next question comes from Daniel Ernst – Soleil Hudson Square.
Daniel Ernst – Soleil Hudson Square
A couple of questions on Comcast. Can you provide some forward metrics on take rates, churn, the whole or other usage metrics coming out of the Boston market where it started? Then you mentioned launching in another New England state besides Mass and New Hampshire with Comcast. Can we look for the service to rollout on a more mass market basis nationwide or in additional markets this calendar year?
Certainly Comcast is focused on doing so and going back to Brian Roberts’ remarks a couple of months ago earlier in the year he said they were certainly looking to roll it out on a multiple market basis we very much are working with them towards doing that. I don’t have metrics along the line you just described to offer. That’s information that Comcast isn’t providing and does not want us to provide.
I can tell you on my basic checklist of where we are with Comcast that the auto box flipping and bug fix activity that we wanted to make sure got done is in fact in terms of our contribution to those efforts basically done. The marketing collaboration with Comcast is just great in terms that we are working with them towards the broader marketing that we believe will step up in the near future.
The Comcast enthusiasm for our current effort as well as other work that TiVo can engage with them on is great and the desire to continue to keep some schedule on additional roll outs is certainly a serious effort with the state that they have indicated will come next. Being the clear indication that is part of the plan.
What we are dealing with now is some other vendors need to complete their work so that the refinements that we have completed can be rolled out and the full-steam marketing can get underway. That seems to be falling into place nicely so that the combination of all of that should allow for the opportunity for multiple markets over this calendar year to become a reality. As they said earlier in the year they said it would be.
The next question comes from Mike Olson – Piper Jaffray.
Mike Olson – Piper Jaffray
A quick question on the guidance. I understand the seasonality but with the revenue expected to be essentially flat quarter-over-quarter is it the primary change leading to the net loss guidance of 2-4 versus the net profit of 3.6 in the past quarter…what is the major thing? Is it marketing expense?
Marketing expense is certainly one element of that since the second quarter tends to be heavier on that front. We tend to have heavier sell-in of boxes into the channel which brings with whatever SAC expenditure those boxes bring with it adding to that. As we’re nearing this latest round of what we think will be toward the end of our litigation efforts with EchoStar some potentially higher litigation costs.
The next question comes from Lee Westerfield - BMO Capital.
Lee Westerfield - BMO Capital
the RPU in the quarter at I think $8.20 for the TiVo owned subscribers, it is a slight step down if I’m not mistaken and I want to understand if that is attributable to the treatment of the lifetime subscribers or to a different factor like perhaps international? I just wondered if you could elaborate.
Secondly, I recognize that the court case details may not be something to discuss here but I wonder if you can discuss what the procedural steps are that might ensue the status hearing or might follow after the status hearing on Friday?
On the RPU front yes, the lifetime accounting change was the biggest impact factor on the RPU decline. Full amortization of lifetime subs contributed beyond that. We have more subs taking non-monthly plans and those plans are great in terms of helping to lower churn but they bring with it somewhat of a lower dollar value although I will add that new subs continue to come on at average monthly revenue well in excess of the RPU number here and we don’t expect RPU to continue to decline in the subsequent quarter. So overall lifetime accounting change is the biggest issue there.
So the issues before the Court in Friday’s hearing are enforcement of the Courts permanent injunction and the determination of damages during the period of the stay and we’re looking for the court to put a schedule in place to resolve those issues.
The next question comes from David Morris – SMH Capital.
David Morris – SMH Capital
My understand from the dish side here is that whatever happens later this week they are going to appeal this thing all the way up to the Supreme Court. So if that happens, which they have led us to believe that will happen, in your experience will the Supreme Court even hear a case like this? My understanding is that they get to choose which cases they hear and which cases they don’t hear. If they choose to hear it what do you think the timing might be for something like that?
The chances of the Supreme Court taking a case like this are well less than 1% so I think it is pretty unlikely that the Supreme Court would hear a case like this. Usually the Supreme Court hears a case where there is a conflict amongst circuits where there is some significant issue of national importance. Whether EchoStar infringes TiVo’s patent or not is hardly of national significance and I think it is unlikely that the Court would hear that.
The next question comes from Ingrid Ebeling - JMP Securities.
Ingrid Ebeling - JMP Securities
Can you please provide some more detail on how the new website has been better designed to market TiVo and then what are some of the marketing efforts that Comcast is doing in the New England region and how many total customers there are now available to in that region?
That last number is not something that Comcast is releasing. In terms of their marketing efforts they have been demonstrating it will be a combination of television, cross-channel advertising, bill stuffers, other forms of marketing that include bundling TiVo with certain other elements that make for a great win-back offering with satellite customers. These are introduced throughout the marketplace they just have not stepped up the frequency yet for the reasons that I stated earlier. A good demonstration of across the board marketing activity.
Our website was redesigned to make it a whole lot easier to understand the full breadth of TiVo and therefore the value proposition. Right on the landing page you get a clear sense that TiVo means music. TiVo means movies. TiVo means videos. TiVo means traditional television. It gives you a much easier way to understand the attributes.
Much easier to understand the value proposition that TiVo is something that brings with it a perception of being much higher priced than the fact of the matter is. Given the pricing for instance by cable now with their DVR’s there are a number of ways you can get TiVo on a monthly basis where using the TiVo HD as your cable box and effectively get rid of your cable hardware you can not only have a DVR offering which is very favorably priced relative to cable but then further reduce the cost that you otherwise incur by getting rid of your cable hardware charges.
That kind of thing which we just really didn’t have a way to deal with and it has become a very considered purchase when you start talking about an entertainment hub plus a DVR and the value proposition issues this isn’t a one-sentence marketing explanation and we needed a way to bring all that together that was graphically eye pleasing, consistent with the look and feel of TiVo and something that had the informational aspects very easy to get at which our previous site did not.
The next question comes from Todd Mitchell - Kaufman Brothers.
Todd Mitchell - Kaufman Brothers
First of all can you tell me the size of the remainder of the inventory allowance? How much do you have that could possibly be reversed? Second, on the monthly amortization of lifetime subs are you using the same contributions from a new lifetime sub contract as you are a legacy lifetime? If so, what is that number? The third question is you said that RPU is not expected to go down again. Did you mean sequentially or year-over-year?
As to the last issue I was referring to what our current RPU was and the next quarter in terms of what we think RPU will be we’re not looking at that likely being a further decline. On the lifetime amortization and inventory reserve issues, Cal?
In regards to the inventory reserve we have about $6.9 million left over at the end of the quarter in that area there. On the lifetime subs we ended the quarter with 677 lifetime subs of which about 163,000 are full amortized.
The next question comes from Tuna Amobi - Standard & Poor's.
Tuna Amobi - Standard & Poor's
Tom, as you talk to cable operators and satellite providers I just wanted to ask about this litigation, do you feel the uncertainty around this litigation is really prohibiting you from doing a lot more deals than you might otherwise have done? In that regard do you feel that the resolution is going to significantly open up, where do you see the biggest upside to the resolution of this litigation?
Well the ongoing discussions we have with cable operators we haven’t yet entered into deals with relates to a number of factors including watching Comcast activities and recognizing that the cable industry needs to overcome some of their own software development issues which have a lot to do with the use with which we’d be able to create applications for them that could be readily rolled out.
The litigation is something that I think a number in the industry are looking at and aware of. Our view is it is one of several factors in the context of our vast distribution business and that an upholding of our intellectual property will certainly contribute to the value we bring to the table in any of those discussions.
Our preference is certainly that we enter into commercial relationships and not litigate and our view is as this EchoStar litigation further clarifies itself that will only be helpful to us in terms of our ongoing distribution efforts.
That’s all the questions we have for today.
Well I appreciate everybody being here with us this afternoon. It was just to sum up a record quarter for us on both the EBITDA and net income front. We are pleased with the ongoing progress on the Comcast and the EchoStar fronts. The progress we continue to make with key relationships in the media industry which is the Disney and Tribune deals underscore is something that continues to be a focus for us. I think it will nicely over time help us with our overall marketing efforts.
We’re making great progress on a product front in terms of being that one-stop shop for all content. One remote. One box. One user interface. All content. We increasingly believe that the recognition of being Best of Breed as a DVR and Best of Breed as a sole purpose solution for all those needs will continue to position us at the cutting edge.
Thanks again for everybody joining us and we look forward to talking to you again soon.
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