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TiVo (NASDAQ:TIVO)

Q2 2013 Earnings Call

August 29, 2012 5:00 pm ET

Executives

Derrick Nueman - Investor Relations Professional

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

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

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

Naveen Chopra - Senior Vice President of Corporate Development & Strategy

Analysts

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

Clark Lampen - Lazard Capital Markets LLC, Research Division

Paul Coster - JP Morgan Chase & Co, Research Division

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

Daniel Ernst - Hudson Square Research, Inc.

James C. Goss - Barrington Research Associates, Inc., Research Division

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

Kannan Venkateshwar - Barclays Capital, Research Division

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

Yung Kim

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the TiVo Second Quarter 2013 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Mr. Derrick Nueman, Investor Relations. Sir, you may begin your conference.

Derrick Nueman

Thank you, and good afternoon. I'm Derrick Nueman, TiVo's Head of Investor Relations. Welcome to TiVo's Second Quarter Ending July 31, 2012 Earnings Call. With me today are Tom Rogers, our CEO; Anna Brunelle, our CFO; and Naveen Chopra, our SVP of Business Development; and our General Counsel, Matt Zinn.

We distributed a press release and 8-K detailing our second quarter financial results. We also posted a second quarter key metric trend sheet on our Investor Relations website that includes, among other information, a reconciliation of non-GAAP measures discussed in today's call. You may access a recording of this call on our website during the next week.

Our prepared remarks should last somewhere between 20 and 30 minutes, followed by a question-and-answer session. Our discussion today includes forward-looking statements about TiVo's future business and growth strategies. We caution you not to put undue reliance on these forward-looking statements as they involve risks and uncertainties that may cause actual results to vary materially from the forward-looking statements, as described in our Risk Factors in our reports filed with the SEC. Any forward-looking statements made on today's call reflect our analysis as of today, and we have no plans to update them.

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

Thomas S. Rogers

Thanks, Derrick. Good afternoon, everyone. This was another solid quarter for TiVo as we made substantial progress across the 5 key areas of our growth strategy: deploying more subscribers within our current distribution relationships, signing new distribution deals, protecting our intellectual property, deepening our capabilities in the audience research business and making progress on our financial goals. Let's start with the progress we've made in terms of distributing TiVo across a large global footprint.

During the quarter, total subscriptions grew by 230,000 over last quarter and increased 41% year-over-year or about 800,000 subscriptions. This success is even more meaningful when you consider that just over a year ago, we spoke to you about our goal of turning our MSO subscription growth positive. In the second quarter of last year, we accomplished that goal, and we've only seen an upward trajectory since then.

So what's behind this success? We believe our subscription growth is the result of operators looking to attract and retain subscribers in a world where consumers have more choice than ever when it comes to where and how they access content. As cable operators are experiencing increasing difficulty attracting and maintaining video subscribers, they are recognizing the urgent need to retain their position as the key providers of the video experience for consumers that takes advantage of their unique offering of broadband internet service. Yet, there are very few partners out there that they can turn to for help. We believe we offer the gold standard of a television user interface combined with the speed and flexibility to implement the delivery of solutions for any operator infrastructure, from a TiVo set-top box in a QAM-based-only environment, all the way to a non-TiVo set-top box or no set-top box at all in a cloud-based IT environment, and many flavors in between. And we package all of it with the only brand in the advanced television space, a brand that is synonymous with consumer friendliness and ease of use. We spent a lot of R&D resources over the last few years trying to position our infrastructure and our code such that we could more rapidly take advantage of the opportunities we knew were coming from operators, and we believe these investments are now beginning to pay off as operators are increasingly turning to TiVo and are finding that once they do, they can clearly set themselves apart from competitors and create stickier subs.

Virgin Media is a perfect example of our success in this area as they recently reported they had reached 1 million TiVo subscribers in just over a year, making it our most successful advanced television deployment to date. Virgin Media's paid television subscribers continue to increase despite the challenging macroeconomic environment in the U.K., all while their competitors are seeing their net subscriber additions slow down considerably. In Spain, despite an even more challenging economic climate than in the U.K., ONO reported that TiVo subscriptions doubled over the last quarter and that they experienced lower churn levels and excellent customer satisfaction metrics. To that end, ONO is looking at ways to get TiVo out more broadly.

Our progress in Europe also advanced this quarter through the announcement of our deal with Com Hem, the largest cable operator in Scandinavia, which is one of the world's leading broadband markets. Beyond reaching a new geographic footprint, this deal demonstrates that the largest cable operator in one of the world's leading broadband markets not only believe that TiVo is the best advanced television option today, but it is also confident that TiVo is the best option for the future when video will be delivered to an IP network from the cloud to any device. As a result of this deal, we believe operators will continue to turn to TiVo to provide a solution that delivers their service to homes with or without a set-top box.

Momentum continues to build in the U.S. as we recently announced the GCI -- that GCI, a top-20 operator and thought leader with small- and medium-sized operators, have chosen to work with TiVo to deploy an advanced television solution for their customers. Like most of the operators we work with or are in discussions with, GCI is not only focused on today, but also on how they can provide their customers with the best television viewing experience in the future. Additionally, it was very important for GCI to choose a provider that could implement quickly and inexpensively, and they believe TiVo is that best option.

Our Comcast integration with our retail product, which is their only product that brings together traditional linear television operator video on-demand and the most popular broadband video offerings all in one experience, has been well received by subscribers in Boston and the San Francisco Bay Area, the first market stop of the service. Comcast will make the TiVo offering available in Sacramento, Portland and Denver next, and we expect multiple more markets to launch this year. Additionally, momentum is picking up with Suddenlink as they recently had their strongest quarter to date, adding TiVo customers at a faster pace than in prior quarters.

In terms of our relationship with Charter Communications, both TiVo and Charter are focused on driving TiVo software to future set-top box platforms and potentially to already-deployed Charter set-top boxes. This is in addition to extending the TiVo user interface to possible future Charter offerings that go beyond the set-top box to any device via the cloud. Tom Rutledge, Charter's CEO, echoed this on Charter's recent earnings call.

Suffice it to say we are very excited about the distribution of TiVo and about the deepening relationships we have with operators around the globe, underscored by the 36% sequential increase in MSO revenue during the quarter. And over the next 12 months, based on our current run rate, we're on pace to drive a significant number of incremental subs. That's quite a contrast from where we were just a year ago. In addition, we believe we remain well positioned to continue to sign on additional distribution deal of all sizes over the next year.

Our advanced television services have enabled us to drive distribution deals and create innovation in the marketplace, and we are quite confident that whether it's the retail or operator product, it's our innovation that will drive us forward. As such, additions to TiVo's ever-expanding suite of products include TiVo Stream, which is launching in several weeks and seamlessly delivers content available on a consumer's TiVo to alternative screens such as iPads and iPhones. Unlike similar offerings in the market, this is the first product to give cable subscribers the ability to simultaneously stream or download their favorite recorded shows, which, by definition, is what they most want to watch, to multiple portable devices without interrupting what's playing on the television.

In addition, the recently announced TiVo Premiere 4 DVR, our new lower-cost retail box with 4 digital tuners that can record 4 programs simultaneously, solves for the Sunday night TV show pile-up. Too much to watch in one night, so viewers want to record a lot of simultaneously scheduled shows to watch over the course of the week. These offerings help to create a seamless television ecosystem that delivers the TiVo experience and any content consumers want, wherever and whenever they want it.

While TiVo continues its goal of driving the best advanced television consumer experience, we are also focused by providing the best analytics and insights for the television advertising industry, providing unique second-by-second TV viewing data. We took another significant step forward in these efforts this quarter with the acquisition of TRA, a company that connects the exposure of television ads to actual purchases in the same household. TRA has proven it can determine the effectiveness of television advertising, helping advertisers identify the right audience and get the most out of their advertising dollars. With this proposition, TRA has driven a substantial client list of advertisers, agencies and networks, including 27 cable and broadcast networks and 45 different advertising brands. This acquisition significantly expands our data analytics business, establishes a new revenue enhancing opportunity and bolsters our ability to provide unique insights to an industry increasingly seeking alternative ways to measure audience behavior.

In addition, as fast-forwarding through content only becomes more prevalent, finding new ways to market through the television screen becomes increasingly imperative for advertisers. TiVo has created solutions that not only allow advertisers to present their content less obtrusively, but we're also developing solutions that allow viewers to make purchases from the screen in a way that does not interfere with the viewing experience. In that regard, we announced we're working with PayPal to give TiVo users the benefit of a TV wallet, the ability to immediately purchase products featured in interactive advertisements on the TiVo user interface through their secure PayPal accounts. Working with PayPal provides an easy way to go from ads and content directly to purchasing products on TV, bringing the effectiveness of advertising to the next level.

As we continue to accelerate our television operator deployments around the world and build our advertising research business, we are also very focused on making sure that the significant value we believe our intellectual property represents is understood. On this note, we are preparing for a trial this coming October in the Verizon case and are moving forward on our other cases involving Motorola, Cisco and Time Warner Cable. While our significant investment in these cases is impacting our expense base in the near term, we believe it is vital to protect our innovation, and we are confident that the return on investment will continue to be substantial over time.

That's a good segue into how we're looking at our financial profile over the next several quarters. From a top line perspective, our recent revenue and subscription growth speaks for itself, and we fully expect MSO revenue growth to continue to benefit from the increasing distribution of TiVo.

From a cost standpoint, we continue to believe we'll exit fiscal 2013 with a lower quarterly run rate on the R&D line than when we entered the year. In addition, we believe we will benefit from our cost reduction efforts even with the increased legal activity associated with the upcoming Verizon trial. The progress we've made in the first part of the year combined with our expectations for the back half give us confidence that, as we spoke about last quarter, we will significantly advance toward our aim of approaching breakeven adjusted EBITDA excluding litigation spend.

As you can see, there's a lot of progress being made at TiVo. Our current yields are bringing the TiVo experience to a greater number of new homes, providing increased customer satisfaction for operators and growing our MSO revenue. We continue to defend our intellectual property, signing new deals that will further increase distribution and establish new growth opportunities, highlighted by our acquisition of TRA. Certainly, we believe the future looks bright for TiVo.

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

Anna Brunelle

Thank you, Tom, and good afternoon, everyone. The second quarter was a solid one for TiVo as we exceeded our adjusted EBITDA and net income guidance, grew service and technology revenues by about 10% year-over-year and grew our subscriber base by 41% year-over-year.

Now let's get into some of the details. Service and technology revenues were $54.1 million, highlighted by a 36% sequential growth in our MSO service revenue, which was offset by a decline in technology revenue. Our cost of service and technology revenue was $12.7 million, and our net hardware loss was $3.3 million.

Operating expenses were $64.7 million. This included $12.8 million in litigation expenses, which was up significantly compared to the prior quarter, primarily due to activity around the Verizon legal case and an accrual of a small, unexpected $3.2 million nonrecurring arbitration judgment that we received last week related to a contractual dispute. Additionally, our R&D spend declined by almost $1 million sequentially as we are beginning to realize our planned cost reduction.

Interest and taxes and other expenses were roughly $1.1 million. This led to a net loss for the first quarter of $27.7 million, which compares favorably to our guidance of a loss of $28 million to $30 million. Loss per share was $0.23 using a basic share count of approximately 119 million shares.

Second quarter adjusted EBITDA loss was $15.8 million, slightly exceeding our guidance of a loss of $16 million to $18 million. The results were driven by lower spend across the organization, including the decline in R&D expense I mentioned earlier and lower TiVo-owned subscription acquisition spend, but offset by the previously described unexpected judgment last week related to a contractual dispute.

Turning to the balance sheet. We ended the quarter with approximately $543 million of cash and short-term investments. During the quarter, we acquired TRA for a cash amount of $18.8 million and repurchased approximately 1 million shares of our stock at an average weighted price of $8.21.

Now turning to our second quarter subscription metrics. As noted earlier, we grew our total subscription base by 41% year-over-year to about 2.7 million subscriptions, and we continue to see a significant contribution from Virgin as well as meaningful acceleration from ONO and Suddenlink. As expected, MSO ARPU increased this quarter to $1.15, which was driven by the increase in MSO revenue as we began to recognize the vast majority of DIRECTV revenue and service revenue. We anticipate double-digit MSO revenue percentage growth in the third quarter over the second quarter.

Now getting into our third quarter guidance. We expect service and technology revenues of $57 million to $59 million, our net loss in the range of negative $27 million to negative $29 million and adjusted EBITDA to be in the range of negative $14 million to negative $16 million. With that, let me provide a bit of detail on assumptions included in our Q3 guidance.

First, we expect the sequential revenue increase to be driven by increased MSO revenue, higher technology revenue and contribution from TRA. Second, with the Verizon trial slated to begin on October 1, we are again expecting a very heavy quarter of litigation spend with an anticipated increase over the recurring portion of Q2 litigation spend. This will offset much of the anticipated revenue gains and cost reductions in R&D that we are making.

Third, we continue to expect reductions in R&D spend in the back part of the year, which will be at least $5 million less than the $60 million spent in the first half of the year, even with the impact from the TRA acquisition. On a quarterly basis, we're expecting modestly down R&D spend in Q3 followed by a more significant step lower in Q4.

Fourth, we expect TRA will be accretive to adjusted EBITDA in our next fiscal year once integration is complete, but we anticipate that we'll incur a modest impact to adjusted EBITDA of up to $2 million in the back half of this year.

To sum up, during the first half of the year, we saw significant improvement in adjusted EBITDA, excluding litigation expense and past damage awards, where we lost $7.6 million, which was approximately 60% better compared to the $19.8 million lost in the first half of the prior fiscal year. In the back half of the year, between improvements to R&D and other elements of the budget, we expect substantially better year-over-year adjusted EBITDA, excluding litigation spend improvement, even with the impact of TRA. As a result of this progress, and consistent with our view from our last earnings call, we continue to advance toward our aim of approaching breakeven adjusted EBITDA excluding litigation spend.

With our success gaining more penetration within current distribution deals, our continued efforts to sign new distribution, potential upside from litigation and our expected cost improvement, we believe we are on the right path towards long-term growth and profitability.

With that, let's now take questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of David Miller of Caris & Company.

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

A few questions. On the TRA deal, you've mentioned that the deal is now going to be slightly diluted in fiscal '13. It's going to be accretive in fiscal '14. I think that's what most of us were expecting who are sort of TiVo bulls here. Is the accretion in fiscal '14, Tom or Anna, because you're expecting a significant revenue bump in that business because of some huge contract that you're expecting to land in the next 6 months? Or is it completely due to cost synergies that's going to take 6 to 9 months to realize? Then I have a couple of follow-ups.

Thomas S. Rogers

It's somewhat a function of cost synergies, but it's a function also of revenue growth. I wouldn't put it on the back of a single contract of some kind that's going to hit, but a number of initiatives that they have going and a number of relationships they have going in the overall trends in the business that make it clear that we see accretive results coming next year, but some of that is a function of cost synergy.

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

Okay. And then Matt, a couple of questions for you. Going to this Verizon trial on October 1, are you using the same counsel that you were using going into the AT&T trial in January, which, of course, that led to a settlement? Or is that -- has there been a change in counsel there? And then somewhat of a related question, just going into this event with Verizon, what's your settlement quotient? In other words, when I say settlement quotient, you obviously have a number in mind. You guys as a company have a number in mind as to what your 389 IP is worth to Verizon. If they were to offer you, say, 80% of that number, 90% of that number, 50% of that number, what is that quotient? What is that percentage where you would say, "Okay, fine, we'll walk away and we don't have to go to trial."

Matthew Zinn

Good questions, David. I'm not going to answer the second question. We're prepared for trial, and we don't discuss settlement on earnings calls. And we are using the same counsel, and we're [indiscernible] case going to trial.

Thomas S. Rogers

I would just add we don't discuss settlement possibilities any time, not just earnings calls, and we are aggressively moving forward.

Operator

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

Clark Lampen - Lazard Capital Markets LLC, Research Division

This is Clark Lampen, actually, in for Barton. First question I had was pertaining to TRA. I know you guys talked about cost synergies mainly kicking in next year. But do you guys expect to see any sort of revenue contribution? And if so, is there a run rate that you might be able to steer us towards?

Thomas S. Rogers

Well, I think I just addressed that, but let me just restate. Yes, we see revenue growth in the business, see cost synergies, see it becoming accretive next year. This is a unique audience research business. It was a modest acquisition for us. But in terms of the franchise that it's carved out for itself in audience research, we think it's a meaningful one in terms of the contribution it makes to the industry. It takes set-top box data, mixes it with purchase data, provides unique insight to households. It's seen -- it's shown that advertising brands want it. Television networks, broadcast and cable want it. Advertising agencies are increasingly growing to embrace it. And with that, we see real opportunity for catalyzing our audience research business, which, as we've talked about, often is a strategic opportunity for us. But we've, we felt, held -- been held back by the TiVo-only nature of what we bring to the table, and this certainly broadens our overall offering. It's got a revenue trajectory to it which we think clearly demonstrates that this is a part of the business for us going forward that can make a decent contribution.

Anna Brunelle

Yes, I can just add to what Tom said and just clarify that looking at the second quarter year-over-year, we did see double-digit revenue growth in the TRA business. And so those trajectories are ones that we like.

Clark Lampen - Lazard Capital Markets LLC, Research Division

Okay. And then if I may, just on the litigation spend. If I heard Anna's comments correctly, it seemed like the litigation expense x this arbitration judgment that you guys received was $16 million or so. Are you guys expecting a meaningful step-up in that?

Derrick Nueman

It was $3.2 million less than $12.8 million, so it's $9.7 million in the quarter.

Clark Lampen - Lazard Capital Markets LLC, Research Division

Okay. My mistake. Are you guys, I guess, on that same point, then, are you expecting a meaningful step-up in litigation, I guess, in the third quarter beyond anything related to, I guess, Verizon or Motorola?

Thomas S. Rogers

Well, we have a number of litigations pending that include not only the ones you mentioned, but Cisco, Time Warner. The most immediate issue is Verizon, which is coming to trial in October, and we always see substantially increased legal fees as we approach that part of the case. So yes, we see an increase in our overall litigation spend, but it is related to all that activity.

Operator

Your next question comes from Paul Coster of JPMorgan.

Paul Coster - JP Morgan Chase & Co, Research Division

Regarding the litigation, you probably saw that ActiveVideo successfully asserted its patent portfolio against Verizon, and I think there's some disclosures in there -- in those proceedings around the value of the per-sub revenues that should be going to ActiveVideo. Is there anything in that, that you can use and are using in your case against Verizon?

Matthew Zinn

Not specifically. It's a different case, different set of facts. ActiveVideo's injunction was overturned because they're not a direct competitor of Verizon. That's a different situation than we are in. Certainly, the financial metrics are things we like in that case, as was the case in the Apple verdict. Settlements seem to -- judgment seem to be getting bigger, so we like that.

Paul Coster - JP Morgan Chase & Co, Research Division

Okay. And then the other question I've got is, you probably saw that Google's hired an investment bank to sell the Motorola Home business. What are the implications of this near term and long term for TiVo?

Thomas S. Rogers

Well, Google's been rumored for quite some time to be looking to sell the Motorola set-top box business, and we'll see if in fact that's how it plays out. I think generally what underscores those rumors is sentiments we've heard that cable operators have made it very clear that they're not interested in certain major strategic players, with Google being one, being in the middle of their relationship with subscribers on the video front. And consequently, Google owning that business would obviously not make much sense. Our view is that we are a strategic ally to the cable industry, and we are one that does not pose the kind of strategic threat that certain players such as Google seem to pose. And consequently, we're getting the traction that we want to see with the cable industry in terms of providing them with the look and feel and user experience that, certainly, other major strategic players would like to provide but come with a very threatening view from operators about letting them do so. So all of that, we like the dynamics of.

Operator

Your next question comes from Alan Gould of Evercore Partners.

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

I've got a few questions, but first for Tom. Tom, you've been successful winning some of the smaller operators. When do you anticipate some of the midsized players, say, 1 million to 5 million sub companies making some decisions about when to upgrade to an advanced TV platform?

Thomas S. Rogers

Well, we've got some 1 million to 5 million sub players in our existing group of operators that have gone with TiVo, and we're in discussions with a number of players that we believe will end up in deals that we'll be able to announce. We aren't giving out timing or anything. But as we said last earnings call, we continue to have a flow of operator deals, and we will continue to have a flow of operator deals through this year. And actually, one that we announced this last quarter in Scandinavia is a good-sized operator in terms of the total number of subs that it has, a quite good-sized operator for Europe, largest operator in Scandinavia, the GCI deal that we announced is a smaller U.S. operator, but we're in discussions with medium and small guys in the U.S. and guys of all sizes outside the U.S., and we expect more deals as we go.

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

Okay. And Anna, is part of the MSO revenue growth that you're guiding to in the third quarter a function of the change in the way you are accounting for the VMED revenue? Is some of that going from hardware to service revenue?

Anna Brunelle

No. Currently, the VMED revenue's in technology revenue.

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

It's all in technology revenue. Okay. And lastly, Matt, is the Cisco case new? Or is there anything new with Cisco? I don't remember them as being one of the litigants.

Matthew Zinn

Cisco filed a declaratory judgment against TiVo at the end of May, and we had that case transferred to the Eastern District of Texas. They filed it in California, it was transferred to Texas. And then the judge basically formed 2 cases, one involving Cisco and one involving Motorola, and put Time Warner as a defendant in both of those cases. So besides the Verizon case, the 2 other cases that we have going is one with Motorola scheduled for trial in May of 2013 and one with Cisco, which is scheduled -- tentatively scheduled for trial at the end of 2013.

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

And Time Warner Cable, you're saying, is a defendant in both? Is that...

Matthew Zinn

That's correct.

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

So there's not a separate case against Time Warner Cable?

Matthew Zinn

Correct. It was consolidated into -- consolidated and split into those 2 cases.

Operator

Your next question comes from Daniel Ernst of Hudson Square Research.

Daniel Ernst - Hudson Square Research, Inc.

A couple of questions. On the progress you're having with some of the U.S. operators, can you give us sort of an update on some of the bigger guys like DIRECTV, which I know is nationwide now, but whether we're seeing any numbers count out of that. And I realize Charter is still rolling out. But if we add those bigger players up, are they having an overall impact? And then for Anna on the -- just sort of simple cash flow, it looks like if we back out the acquisition you made and the well-timed acquisition of your own stock in the quarter, it looks like you're actually were probably cash flow positive. I just want to make sure I'm doing my kind of simple math correct for the quarter and whether you expect that to start to fade in the second half given the uptake in legal expense?

Thomas S. Rogers

Naveen, why don't you take the first one?

Naveen Chopra

Sure. Dan, so on the Tier 1 operators in the U.S., kind of have to look at those somewhat case by case, given that our relationship with each of them is a little unique. As you know, DIRECTV, we're now available nationwide, albeit as an optional platform. So we're not the primary platform that DIRECTV pushes, and we recognize that, that will have some impact on kind of sub growth that we see there, but the economics of that deal continue to be very attractive for us. So we have some good returns regardless of the sub results. Comcast, we continue to make progress with in our retail co-marketing approach. We're out in a couple of markets now with more to come. Given that that's a product that ultimately is distributed at retail, the absolute magnitude of the subs there will look more like a part of the retail business. But as you know, the economic of that are such that we don't have to get a lot of subs there for it to move the needle in a meaningful way. And we've commented on Charter recently as well. Obviously, deployment there has been slowed by the fact that Charter is now looking to utilize TiVo on a next-generation platform that is still being determined. So we don't have as much visibility in the timing there as we'd like.

Thomas S. Rogers

Meaning Charter is looking at their hardware options in terms of that next generation as they move forward on our interface relationship with them.

Daniel Ernst - Hudson Square Research, Inc.

And sorry, Naveen, just a follow-up on the DIRECTV. But is it correct to assume they are still a net negative with their legacy box still churning off?

Naveen Chopra

Yes, I think that's correct.

Anna Brunelle

In regards to your cash flow question, I think your comments are true after backing out the acquisition costs and the stock repurchase. We don't give a lot of forward guidance on cash usage. But overall, I think that you can expect that gap to narrow as we get closer to approaching our adjusted EBITDA breakeven goal that we're aiming for. That being said, there are always some timing differences in terms of timing of licensing payments and such during the year that you'd have to take into consideration as well.

Derrick Nueman

But Dan, definitely the higher legal spend this coming quarter will be a direct hit to cash flow.

Operator

Your next question comes from Jim Goss of Barrington Research.

James C. Goss - Barrington Research Associates, Inc., Research Division

A couple of questions. One, just to clarify what you're saying about Comcast. Do you then count those subscribers as part of the TiVo-owned additions and...

Thomas S. Rogers

Yes, we do.

James C. Goss - Barrington Research Associates, Inc., Research Division

Yes?

Thomas S. Rogers

Yes.

James C. Goss - Barrington Research Associates, Inc., Research Division

And then the ARPU would be more like the full $15 or something of that nature?

Naveen Chopra

Yes. I mean, we don't disclose exact numbers. Comcast does have some participation in that, but the economics look a lot more like a retail sub than an MSO sub.

James C. Goss - Barrington Research Associates, Inc., Research Division

And then what would be the number of markets you would ultimately target and the sort of objectives you think in terms of the share you might get, perhaps, if you want to put it that way, within these markets? Can you get 5% of the subs, do you think? Or is that optimistic? Or it would be much better than that?

Naveen Chopra

The plan -- the focus with Comcast right now is to get the service rolled out in all of their top markets, which will address most of the meaningful parts of their footprint. In terms of penetration within each of those markets, to be honest, it's a little too early to tell. We've had a few months of experience in the Bay Area and a little bit in Boston, and I think we probably need to let that run a little longer. We're continuing to, in conjunction with Comcast, test a number of different marketing approaches. I think once we have a better handle on that, we'll have a better sense of what kind of penetration to expect.

James C. Goss - Barrington Research Associates, Inc., Research Division

And your application can include all of the XFINITY-type applications that they're offering now?

Naveen Chopra

Well, the essence of the product, and I think the thing that makes it so distinctive, is the fact that through that single box, you get access to the full suite of Comcast video-on-demand service, which is obviously very popular as a kind of catch-up experience, as well as all of the over-the-top services that are available through a typical TiVo retail platform: Hulu, Netflix, Amazon, et cetera. So it is a truly unique offering, and there's literally nothing else in the marketplace that can give you access to that much content through a single experience. In terms of the mobile applications and things of that nature, it's all available in the same way that it is to a TiVo retail subscriber. So we have that part of the experience as well.

James C. Goss - Barrington Research Associates, Inc., Research Division

Okay. And then lastly, the -- could you talk about the configuration involving TiVo without a set-top box? Exactly how would that be implemented? Would it be built into the TV somehow? And I know it's your software rather than hardware solution, but how exactly would it transpire?

Naveen Chopra

Yes, at the end of the day, what is the consistent part of that is there's a cloud component of it that -- where all of the intelligence and the information about users and their preferences and all the metadata is stored. Our intent is to make that available to a growing number of devices over time. So it will start with things like, obviously, iOS devices, Android devices, the browser. As you get into things like connected TVs, game consoles, et cetera, those tend to be more proprietary platforms. But we do intend over time to address as many of those as possible.

Thomas S. Rogers

Just to note on that last point that the Scandinavian operator mentioned earlier, Com Hem, has put in place an arrangement with us for us to deliver a full IPTV cloud-based solution that is not dependent on the set-top as part of that arrangement. So this is something we are actively engaged in for operators today who choose to go to that level of IPTV delivery.

Naveen Chopra

Yes, and I guess just to crystallize it, I mean, the reason someone like Com Hem is so enthusiastic about that is they believe there is a growing number of subscribers who want access to pay television content on a mobile device, on a PC, potentially on a connected TV that has some sort of browser. And this is a very efficient way for them to deliver the full complement of that service with a great user interface without having to deal with the operational complexity of getting a set-top box into the home.

Operator

Your next question comes from Andy Hargreaves of Pacific Crest.

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

Just continuing along the lines here of the cloud-based solution, how far along are you guys in development of that? I mean, when would it be possible to actually let it out?

Naveen Chopra

We have not disclosed specific timing. I think we have some customers here in the U.S. as well as mentioned Com Hem in Europe where we expect that to be deployed over the course of the next few quarters. It will obviously evolve over time. So it will support a certain number of consumption devices when it first launches, and that will expand from there.

Thomas S. Rogers

As a result of that, we'll have a full range of solutions for operators that start with ones who want to take our own hardware and software combination and implement a set-top box advanced television strategy moving toward those who may want to have a partial IPTV implementation around their TV Everywhere products to those who would want a full IPTV implementation that would involve not necessarily needing a set-top box in the middle of the configuration. So we're really in a position to be able to implement across all kinds of possible ways that an operator would want to bridge today's technology with tomorrow's or jump all the way to tomorrow's.

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

Just getting back to TRA, can you give us any absolute numbers? You talked a little bit relative, but is there a baseline revenue run rate that you can tell us that they're at or anything like that?

Derrick Nueman

Andy, this is Derrick. I mean, it's a real revenue number. We're growing nice double-digits that's on a set [ph]. But it's not to the point where we're ready to break out or need to break out.

Thomas S. Rogers

But I would say it is a revenue contribution that comes from a broad array of clients and therefore is not heavily dependent on any 1 or 2.

Derrick Nueman

And it's 1 of the 3 items that are responsible for that sequential revenue jump between this past quarter and Q3.

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

Okay. That's helpful. And then just on the -- back to the kind of the Comcast expansion, would you expect a change in the trajectory of your TiVo-owned gross adds as that expansion happens? Or is the contribution relatively limited and we may or may not notice it?

Thomas S. Rogers

It will certainly be a factor. I mean, we are putting together a number of things which we think can make a difference in terms of the trajectory of the standalone business. There is the TiVo Stream product that many of you may have seen reviewed very positively in today's Wall Street Journal as a way to have a cable set-top box that transfers your recordings to your iPad, a major hole, we think, in the midst of what's available for consumers today in terms of ways to easily watch television. We have our 4-tuner TiVo offering, which is something that is getting a lot of early acceptance in the sense that while DVR technology is something that people may be familiar with, they are finding that the more reliant they get on a DVR, the more content that they want to make sure is there in certain nights of the week, Sunday in particular, which has a large number of hit shows that people want to watch over the course of the week. If you don't have a 4-tuner capability, which this will be the first in the cable world, you don't really have an ability to get all that programming, shop for it on Sunday and watch it the rest of the week. The Comcast piece and the friction that, that takes out of the process and the additional program content offering and its uniqueness that Naveen discussed is certainly a part of it. And just the fact that we are the only solution out there for a cable subscriber that wants all his linear channels but at the same time wants Netflix, Hulu, YouTube broadband content brought into the single interface with a single remote. And the list of reasons, therefore, for us to be able to drive clear distinctiveness of TiVo as a standalone product is becoming more clear. We've been very controlled in terms of our marketing expenditures towards driving that standalone business, but we also think that there's enough of a set of reasons for people to get that, understand the differences and become happy subscribers, that we're always focused on how do we tell that story in a way that we think will ignite better the standalone sales. So certainly, Comcast will be a factor there.

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

Okay. And just -- I'm sorry, but will TRA be in TiVo-owned or MSO service revs?

Derrick Nueman

We're still working on how we're going to report that. Historically, our advertising research have been allocated across the 2, but we haven't gone to the final decision how we're going to report it.

Operator

Your next question comes from Kannan Venkateshwar of Barclays.

Kannan Venkateshwar - Barclays Capital, Research Division

I have 3 questions. The first is, you mentioned Charter making a decision on the hardware and the next generation that they want to go with. So should we expect some increase in R&D whenever they make that decision so that your software is customized to whatever hardware they go with? That's one. Secondly, recently, there's been some news flow around Apple TV and some of the formats which have been spoken about. So my question specifically is would you expect Apple to have to talk to you at some point, given your patent portfolio and your success on the litigation front, assuming, of course, that some kind of a DVR feature would be included in their television? And thirdly, in terms of your stock buyback, why haven't you been more aggressive given where the stock was till recently?

Thomas S. Rogers

Okay. Let me try and knock those off. On the R&D front, we are always looking at ways to create efficiency across our R&D expenditure. We've indicated that we're going to begin to bend that curve downward. This quarter, we reduced our R&D spend modestly. We'll continue with that in the third quarter and indicated that in the back half of the year, we'll be looking to take out about $5 million or more of R&D expenditures. So we're constantly innovating in terms of software, hardware, new offerings and features. And as we look to drive that innovation, we are still looking to be able to bend that curve in the direction that we've started to. With respect to Apple TV, look, that's a bunch of rumors out there. As I said in response to the question about Google and Motorola, there's certainly a number of large strategics out there, and I put Apple in the same category as Google, where cable operators have felt quite threatened about companies coming in and being smack in the middle of their video business, creating relationships with their subscribers that over time can undermine the value of the cable operator's relationship with that subscriber and in so doing devalue the operator's video business. We see most operators are quite resistant to that whole notion and have been very, very careful about what kind of strategic relationships they enter into that could create that kind of threat. I think we've been able to walk that line quite well with operators and offer them a great way to drive advanced television with a great brand behind it without the kind of threat that has hung over the heads of certain other players. I'm not going to comment on our relationship relative to our patents with any third parties. Obviously, we aggressively protect our intellectual property and our DVR patents. And to the extent that we feel that we are in a position where somebody is using our intellectual property without our permission, we are going to aggressively pursue that. And with respect to the stock buyback, look, we've been very cautious with the use of our cash. We certainly saw an opportunity to buy back some shares at a very advantageous price. We continue to believe that our stock price is undervalued. We've been very cautious with the use of cash for acquisitions, the TRA acquisition being a very modest one. We're going to continue to evaluate the opportunity to use that cash in a way that drives shareholder value, and that includes continuing to evaluate when share buybacks are appropriate. That gets quarterly discussion and more with TiVo's board, and so that is an ongoing focus. And this last quarter, we took advantage of where the stock was, and I would simply say that it is by no means something we won't continue to look hard at.

Operator

Your next question comes from Rich Tullo of Albert Fried.

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

I guess you're kind of -- and was asked this before, but I'll ask it again. Specifically, what is the opportunity represented by Comcast specifically if you're going to go across the whole network? Because I like that business, and I think it's got much higher revenue potential than some of the other things that you're doing right now. And it seems to be 23 million subscribers is a huge potential market for you guys.

Thomas S. Rogers

Well, when it comes to the largest players, like DIRECTV, like Comcast, we've decided that having a side-by-side offering relative to what they are otherwise doing is our best play as opposed to how we're working with other operators where we are really the primary exclusive means that they're driving advanced television. And so this is a unique relationship with Comcast. It serves the purpose of giving them an offering which puts the Netflix and Hulu and key broadband content along with their XFINITY product up on people's television screen to something that they can install and clearly participate in the sub fees that we get from and therefore provides a real answer to an alternative to their own product, which doesn't have a bunch of the attributes that TiVo does. And we are working with them to expand that to a number of other geographies, and as Naveen said, the whole-home features that come with TiVo, including our new product stream and the ability to get that content into an iPad, is part and parcel of what that Comcast subscriber would be able to take advantage of with the TiVo-Comcast offering. So it's certainly part of our mix and one that we are, I think, can contribute to our standalone business, and it's one that is interesting for those biggest operators who view this area as so strategic that they're tending to do what we do for others themselves.

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

The cloud products and services that you're going to start rolling out, are they a unique development by TiVo's R&D? Or do you have partners in these services as well on the technology back end side?

Thomas S. Rogers

There are partners in the case of certain operators where we've been engaged to implement their TV Everywhere whole-home strategy. In some cases, we may be partnering with somebody, but the guts of the delivery of our service and the key elements of the user experience that we deliver that integrates all the content offerings and the various applications that flow from that, that's a function of our R&D and our R&D and development. And one of the reasons that our R&D increased over the last year was that we saw that we could take TiVo out of the set-top box and we could create a broad array of offerings for operators as they thought about how they could be delivering their service to any number of other devices. And so we now have a very high degree of expertise and are gaining increasingly implementation expertise in all of that, which I think will continue to set us apart as the leader in advanced television for the cable industry.

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

All right. And one last question, will TiVo explore ways to work with consumer electronics or consumer software firms to license out the TiVo technology where you can control the experience as well as, perhaps, the disruption to the industry? I mean, it seems to me that a big portion of the Cisco lawsuit was that they were originally interested in licensing your technology and weren't able to come to a deal. If that story is true. I mean, it was in their legal documents, but who knows if that was true or not?

Thomas S. Rogers

Well, without commenting on any litigation or the patent side of that issue, we certainly work with a number of consumer electronics players, Cisco, Samsung are examples of that, where we build our software into other people's hardware. Pace is another worldwide provider of set-top boxes where we build our technology into other people's hardware. So we recognize that partnering in terms of what we bring to the table with other aspects of the ecosystem here is part of this. Our licensing of our intellectual property as it relates to working with partners who distribute TiVo and how we conduct ourselves with respect to our intellectual property is -- raises some different issues for us. But we are very much able to pursue partnering relationships in the industry.

Operator

Your final question comes from Yung Kim of Brean Murray, Carret.

Yung Kim

First of all, could you talk a little bit about the pricing on your UI contracts for next-gen platforms that include TV Everywhere? Specifically, if it -- does it go by household per device or a little bit of both? And basically, what I'm trying to get at is whether those contracts can scale upward. And also at the same time, if you could talk about -- if you could quantify the incremental cost of developing a TV Everywhere UI for both a custom-dedicated CPE platform like Virgin or a TV hardware platform like for RCN.

Naveen Chopra

Sure. This is Naveen. On the first question around the pricing of contracts, obviously, I can't get into the specifics about our deals with various distributors. I think we've described before that they all tend to be somewhat unique, depending on the market, on the way that TiVo is being offered on specific capabilities and needs of the operator. They all have upside opportunity in the sense that they are -- what we get paid is a function of growth, whether it be, in some cases, on a per-subscriber basis, in some cases, on a per-box basis. We have other ways of generating revenue through advertising presence, for example, in those deals as well. So there is certainly an element of it that continues to scale as deployment continues to scale. The second question in terms of the cost of development of TV Everywhere, there's a lot of leverage there based on the core implementations with any of these partners. And also, as you know from other deals we've done in the past, the operator does bear some of the funding burden for the elements of those solutions that are unique to them. So to the extent that there's a lot of customization required, that does not all come from TiVo's R&D budget.

Yung Kim

And also just one more, can you talk a little bit about the source of the ONO gross adds this past quarter? Is a piece of that coming from the MSO channel? Is that meaningful at this point?

Matthew Zinn

You mean ONO in Spain?

Yung Kim

The owned and operated?

Thomas S. Rogers

Well, the TiVo-owned subs do not, with the exception of the Comcast deal that we were speaking about, do not come from the MSO side of the equation. Those are retail gross additions, and that is a combination of subs that we sell to online as well as subs that we sell through Best Buy and other retail establishments. The standalone gross additions were up about 10% year-over-year, and we had the lowest net loss of TiVo-owned subs, I believe, in the last 3 years this last quarter. So as I mentioned before, we have a number of factors there that we hope to grow that business with, but those are our retail subscribers.

Yung Kim

Okay. Great. And one last question. Do the claims against Motorola and Cisco, do they extend past Time Warner Cable as well?

Matthew Zinn

The claims against Motorola relate to set-top boxes that go beyond set-top boxes that they sell to Time Warner.

Operator

This concludes today's question-and-answer session. I would now like to turn the floor back over to Mr. Tom Rogers for any closing remarks.

Thomas S. Rogers

Thank you very much. We feel good about our product development, Stream being a great example, feel good about the ongoing progress we're making with operators, more deals we hope to announce over the rest of the year. We are making good financial progress, as we've laid out with you today, and our audience research business is something that we think we gave a good boost to with the TRA acquisition. All in, we think a very good quarter for us. Look forward to filling you in more. Thanks very much.

Operator

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

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