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TiVo Inc. (NASDAQ:TIVO)

F2Q09 Earnings Call

August 27, 2008 5:00 pm ET

Executives

Derrick Nueman - Director, Investor Relations

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

Cal R. Hoagland - Interim Chief Financial Officer

Analysts

Alan Gould - Natexis Bleichroeder

Daniel Ernst - Hudson Square Research

Tony Wibel - Citigroup

Barton Crockett - J.P. Morgan Chase  

Tuna Amobi - Standard & Poor's  

Lee Westerfield - BMO Capital

David Miller - Caris & Company

Operator

Welcome to the TiVo second quarter fiscal year conference call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Derrick Nueman, Head of Investor Relations.

Derrick Nueman

Thank you and good afternoon. I’m Derrick Nueman, TiVo's head of investor relations. With me today are Tom Rogers, CEO and President; Cal Hoagland, Interim CFO; and Matt Zinn, General Counsel. We are here today to discuss TiVo's financial results for its fiscal year 2009 second quarter ending July 31, 2008.

We have just 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 to investor relations section of our website.

The prepared remarks today should take about 30 minutes and then there will be a question-and-answer session. In our prepared remarks, when we refer to a specific quarter, it is based on our fiscal quarters.

Our discussions today include 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, operations, financial performance and guidance, distribution of 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," "expect," "will," or similar forward-looking terms. We caution you not to put undue reliance on these forward-looking statements as they involve risks and uncertainties that may cause actual results to vary materially from those forward-looking statements.

Factors that may cause actual results to differ materially include those described under "Risk Factors" in our public reports filed with the SEC, including our latest 10-K and Qs.

Any forward-looking statements made on this call reflect analysis as of today and we have no plans 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 second 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.

Thomas S. Rogers

Thanks, Derrick. Good afternoon, everyone. Let me give you an overview of our second quarter. This was yet another solid quarter for TiVo. We beat our guidance on adjusted EBITDA very significantly, coming in at $10.6 million and posted net income results that were approximately $20 million above the same period last year. We were net income positive for the second straight quarter. Our balance sheet is very strong, with over $100 million in cash and cash equivalents. We generated $10 million in cash from operating activities in the quarter and we only expect our financial profile to improve once we receive our substantial award in the EchoStar case.

These results underscore TiVo's improved financial strength. When you add it to the growing traction with customers of our advertising, audience research, and international distribution businesses, combined with our MSO relationships, we believe we have the key growth drivers in place to build on our improved financial footing.

On that note, let me speak briefly about our Comcast relationship. We are pleased with the rollout progress thus far and are excited about what we can expect going forward. Comcast is equally pleased. Let me pass along some comments from a recent conversation I had with a top executive at Comcast who offer the following comments, and I’m quoting here: “We are pleased with the progress of the TiVo service and have broadened its footprint in our New England market to Connecticut. Refinements to optimize the product’s performance have been mostly completed, significantly improving the user experience. Importantly, we intend to light up a full marketing campaign around TiVo in September and upon this occurring, we will be announcing multiple additional markets to which TiVo will be rolled out through next year. We will also continue to fund development work for the TiVo product, which will include expanding the feature set and adding support for true two-way infrastructure.”

As you can see, this relationship is one Comcast considers very important to its own growth and ability to maintain a best-of-breed offering for its subscribers. Additionally, the TiVo service on Cox, which is currently in trial, is on track for a market launch in Cox’s New England market later this year.

Beyond our domestic progress, we also have a lot of momentum on the international front, where we continue to expand our global footprint through strategic alliances with international broadcasters and cable companies. TiVo and Seven successfully launched in Australia and because of significant consumer demand there, Harvey Norman’s, the Best Buy of Australia, chose to release the product early. We are especially pleased with the considerable marketing effort Seven has put behind this launch as they’ve prominently featured TiVo in their marketing and programming, including the Olympics, and a special advertising spot they’ve developed, which includes dozens of Australian celebrities joining the TiVo bandwagon.

Getting to the rollout phase of our relationship with Seven has had a real impact on how others in the global media world are viewing the value of TiVo's potential as a solution in their own markets.

On the intellectual property front, we are getting closer to resolution on our EchoStar case and are now in the enforcement phase of the process. Next week on September 4th, there is a hearing scheduled to determine whether EchoStar is in contempt of the injunction that has already been upheld by the U.S. Court of Appeals for the federal circuit. The hearing will also determine further damages from EchoStar’s continued infringement.

Additionally, EchoStar has appealed to the Supreme Court and we believe it is very unlikely this case will be heard. We remain confident in the outcome and look forward to final resolution in the near future and the full value of our intellectual property being realized.

On the TiVo owned side of the business, our goal of creating the ultimate television dream machine is becoming a reality. Broadband content directly to the television is a key part of what the television experience will become and we are continuing to define these offerings in the marketplace. As a matter of fact, this quarter we announced the availability of YouTube on TiVo. This nicely augments all of the videos that are available through TiVo Cast and web season pass already. Through TiVo, you can get more content -- movies, television shows, videos, songs -- than through any other option in the world and these content offerings will grow.

Sometimes TiVo will record the content and sometimes it will retrieve it but the net result will be literally millions of pieces of content available to your TV and TiVo is the only solution that easily accesses and navigates this world of infinite choice.

In terms of managing the financial aspects of the standalone business, we continue to watch our marketing spend. The result has been meaningful as our subscription acquisition costs were $135, a considerable decrease when compared to SAC of $758 in the year-ago quarter. Additionally, as we have mentioned before, we have expanded our efforts to work with leading retailers and consumer electronic manufacturers to bundle TiVo with HD television sales and believe this can help us to drive additional sales at efficient acquisition cost levels.

For example, in six large Best Buy markets involving many stores, TiVo is being made available as part of a special bundled offer as the recommended cable set-top box of choice to be purchased with HD television. Also in these markets, Best Buy is creating a TiVo branded living room environment, making the television entertainment experience in the store as compelling as possible.

What’s making this even more forceful is that even in this murky economic environment, the Consumer Electronics Association estimates the sale of 32 million HD sets this year and we believe there is no better way to get more enjoyment and more options out of this major household purchase than through TiVo.

Another key example of our partnering with third parties to use their marketing resources to drive TiVo is the announcement we made today with the leading consumer entertainment industry magazine, Entertainment Weekly. We are teaming up with Entertainment Weekly to deliver and jointly market its what to watch TV pick directly to the television set, while TiVo automatically records the recommended shows. This ensures that broadband enabled TiVo users always have the best programs available to watch whenever they tune in.

This partnership allows two powerful brands to work together to create a seamless television viewing experience, underscoring TiVo's goal of providing easy solutions that bring together television viewing with an individual’s lifestyle.

We are encouraged by the number of media companies that continue to express real interest in using TiVo's technology to help bring innovation to their existing business models and view these relationships as an opportunity to drive incremental subscriptions in an efficient manner.

Before I move on, I want to quickly touch on churn. This past quarter, we saw our churn rate tick up slightly back to where it was the quarter before last. We believe the critical element to managing our churn is getting in front of the HD upgrade cycle. This means understanding which subs are likely to upgrade to HD, presenting them with the right upgrade offers, and making sure that these customers know that TiVo is vastly different from the generic DVRs currently on the market. And it’s not only the specific offer but the timing of getting the offer in front of these people before they’ve already purchased a generic DVR. This is one of the reasons why bundling a TiVo at the time of the HD set sale is an important element of our overall strategy.

To give you a sense of our current messaging, you may hear on radio ads soon, actually, which we have purchased on a very limited basis, which go something like this: Sure, you’ve heard of TiVo. You probably had friends who spent the last two week using TiVo to record the Olympics so they caught everything. So you know what TiVo does, right? Wrong. What you don’t know is that at a retail store right now, TiVo is showing off what it does today that most people thought was only a far off dream. TiVo now gets you millions -- yes, you heard right, millions of songs and videos and thousands of movies and TV shows that your satellite and cable company doesn’t. You see, TiVo has gone from being the best way to record TV to also being the best way to get anything to your TV. And you know what else you did not know? TiVo will probably save you money on your cable bill and the service can cost you a lot less than those basic DVRs that can’t begin to get you what TiVo does.

Well, sorry for the amateurish commercial rendition but I wanted to give you in a nutshell a concise statement of our current consumer proposition. And beyond our own limited advertising spend, we have a much more extensive role in the broader world of advertising. As I’ve spoken to on several occasions, we are no longer the disruptor in the television advertising world and we continue to make substantial progress in building relationships in this regard.

We are working with dozens of major television advertisers, advertising agencies, television networks, and cable players on a number of very compelling solutions that could help to stem what is becoming the most important issue facing the economics of the media business. However, while the issue is recognized, the fact that the television industry may face a crisis in the next two years as a result of the commercial avoidance fast-forwarding through commercial issues, has not been recognized. DVR growth is very significant, as there are currently around 25 million households with DVRs and most analysts estimate there will be over 50 million in the next two to three years. This means that the issues related to fast-forwarding through commercials are only going to become more evident and dire unless there is wide adoption of the means by which television advertising can maintain its effectiveness in this new environment, based on ad solutions that are specifically molded for a world of DVR based viewing.

Along these lines, we announced this quarter a deal with Amazon that provides TiVo users with the ability to purchase products from Amazon.com directly from their television sets, enabling advertisers to strategically promote merchandise on any network or program.

Our new product purchase offering garnered significant media attention, largely due to the fact that the new interactive advertising solution is consistent with how people actually watch television and brings immediacy to product purchase because it focuses on the media products themselves. Viewers have the ability to pause what they are watching while searching for and purchasing merchandise right from their TV, and then return to their show without having missed a second, a component absent from previous failed interactive advertising efforts attempted by many over the years.

This approach has particular relevance for the increased placement of products in television shows themselves, giving viewers the ability to immediately find out about products and to enable impulse purchasing, increasing the effectiveness of this new form of advertising.

Our innovative ad efforts and solutions are beginning to show results. Approximately 50% more advertisers utilize TiVo in the second quarter of this year than the second quarter of last year. This is clearly an indication that TiVo is and will continue to play a meaningful role in the future of television advertising.

The other leg to this exciting component of our business is our audience research and measurement offering, which has brought about a new dimension of accountability and transparency for advertising spend to the media industry.

During the quarter, we launched our power watch rating service, a powerful research tool that’s essentially a companion to our flagship stop watch rating service. Power watch combines second-by-second program and commercial ratings data, with demographic segmentation from an opt-in panel of 20,000 TiVo households to provide for the first time a report that gives commercial ratings in an DVR environment based on demographic data.

One of the very important teachings from this data is unlike what many in the media industry may have assumed or wished for, all viewers are fast-forwarding ads at high rates and it is by no means a phenomena of TiVo early adopters.

In addition, we have developed partnerships that combined our viewing behavior data with purchasing decisions coming out of DVR homes. Our recent announcement with TRA is going to help provide marketers with the ability to get from a single source reports that measure the effectiveness of advertising by analyzing the long-sought correlation between advertising and the precise purchasing data emanating from the very household that viewed the ad. The TiVo TRA offering not only provides this unique view but does so on an unprecedented scale for up to 1 million households by utilizing a proprietary method of matching anonymous viewing behavior with purchasing behavior.

In conclusion, this has been another solid quarter of progress for TiVo. Against the backdrop of all the strategic progress that we made, the company’s financial profile continues to substantially improve. While there is much progress to be made on all fronts, we believe that by defining the standard for how viewers will watch television, securing the domestic and international distribution to advance our subscription numbers, creating the key solutions and tools for how advertising and audience research will need to be pursued in this new ear, and solidifying our progress with very significant intellectual property all combine to continue to give us the basis to grow our business in all areas.

With that, I will turn it over to Cal.

Cal R. Hoagland

Thanks, Tom and good afternoon, everyone. For the second quarter this year, we reported another strong profitable quarter with net income of $2.9 million and adjusted EBITDA of $10.6 million, both of which are significant improvements over the same quarter last year and are considerably better than guidance.

More specifically for the second quarter, let’s step down our P&L. Our service and technology revenues were $53.5 million and of that, our service revenues were $48.2 million, which was down from the same quarter last year. This was impacted primarily by product lifetime subs becoming fully amortized, thereby no longer contributing revenue, as well as continued decreases in our DIRECTV sub base.

Our technology revenues were $5.4 million, down $1 million from last quarter and up about $2 million from the same quarter last year. Technology revenues will continue to fluctuate based on the nature of third-party work done for service providers in any one quarter.

Excluding about $700,000 in expenses related to stock-based compensation, our cost of service and technology revenues were $13.6 million for the quarter and that included $11 million related to the cost of service revenues. The service gross margin, excluding stock-based compensation, was 77%.

Our hardware gross loss was $3.6 million, and that consists of two major buckets. The first bucket is our hardware box’s net cost -- that is the hardware revenue offset by hardware cost and expenses. This bucket accounted for $1.5 million of the $3.6 million hardware gross loss. In the second quarter, our hardware box’s net cost benefited from the utilization of about $1.4 million in standard definition inventory reserve related to boxes sold during the quarter. The second bucket of our hardware gross loss is our retail channel costs and expenses, including rebates and revenue share. This accounted for the remaining $2.1 million of the $3.6 million hardware gross loss.

Operating expenses excluding stock-based compensation as a percentage of service and technology revenues were as follows: sales and marketing expenses were 12%, which is a substantial decrease from the 25% we incurred in the same quarter last year. This decrease was primarily driven by lower marketing expenses. The portion of sales and marketing expenses related to subscription acquisition costs represented 2% of service and technology revenue.

Research and development expenses are 25% of service and technology revenues and G&A expenses were 16%.

Net income for the second quarter this year was $2.9 million. Now, this compares to our guidance of a net loss of $2 million [and $4 million]. Our net income per share was $0.03 for the second quarter, which compares to a net loss per share of $0.18 for the same quarter last year. Our diluted net income per share calculation for the second quarter of this year was based on 102.2 million weighted average shares. With aggregate stock-based compensation expenses of $5.6 million, net interest and tax income of $0.3 million, and depreciation and amortization expenses of $2.5 million, our adjusted EBITDA for the second quarter of this year was $10.6 million. Now, this compares to our adjusted EBITDA guidance of a positive $3 million to positive $5 million, and our adjusted EBITDA loss of $11.2 million in the same quarter last year.

The better-than-anticipated net income and adjusted EBITDA was driven by better-than-expected hardware margin and lower-than-anticipated operating expenses, primarily less marketing expenses. Additionally, both our net income and adjusted EBITDA in our second quarter have a benefit of $1.4 million in fair definition inventory reserve utilization and that compares to the same quarter last year when we recorded $11.2 million inventory provision for standard definition product.

Turning to the balance sheet, we ended the second quarter this year with over $105 million in combined cash. Combined cash is our cash plus cash equivalents plus short-term investments. Our combined cash balance is up about $11 million sequentially from the first quarter, with most of the increase in cash generated by operating activities.

Please note that our cash position doesn’t include any EchoStar litigation award damages, which aggregate to over $100 million.

Now, turning to our key pricing and volume metrics, our TiVo owned gross additions were 36,000 in the second quarter. This was a decrease of 12% compared to the same quarter last year, which is an improvement over the trends of the past several quarters.

Our churn was 1.5% per month in the second quarter, the same level we experienced in the fourth quarter of last year and up from the 1.3% last quarter, as well as the 1.2% in the same quarter last year. The increase was due to a higher number of fully amortized product lifetime subs rolling off and from subs churning off of our standard definition DVRs as they upgrade to HD DVRs from cable and/or satellite providers. We will continue to be focused on managing churn and as Tom mentioned, getting in front of the consumer’s decision to upgrade to HD cable boxes.

On a net basis, our TiVo owned subscriptions decreased by 42,000 in the second quarter this year. Our TiVo owned subscription base ended the quarter at approximately 1.7 million subs.

Our MSO broadcaster sub base includes DIRECTV, Comcast, Cablevision Mexico, Seven and other mass distribution relationships, and this sub base declined by 136,000 sequentially from the first quarter of this year. As expected, during the second quarter this year, our DIRECTV base continued to churn as no new subs are being added and as DIRECTV is heavily promoting its HD offering, as well as transitioning to an MPEG-4 platform across its entire footprint. Further, we expect Comcast will begin to contribute more significantly to our sub counts once marketing begins in September in the New England region.

Our overall sub base stands at approximately 3.6 million subs at the end of July this year. For our second quarter, our TiVo owned average revenue per user was approximately $8.25, up slightly from last quarter. However, we saw a large year-over-year decrease in ARPU primarily due to a larger number of fully amortized product lifetime subs that, once fully amortized, are non-revenue generating for the purposes of this calculation.

At the end of the second quarter, we had approximately 194,000 TiVo owned product lifetime subscriptions that have reached the end of this amortization period that we use to recognize lifetime revenue. This represents 30% of our current total lifetime subscription base which stands at about 651,000 subscriptions at the end of the second quarter.

Now let’s look at our total acquisition costs and our subscriber acquisition costs. Our total acquisition costs were $4.8 million in the second quarter of this year. This was a significant improvement compared to the second quarter of last year due in large part to less marketing expenses and lower box subsidy. Last year’s second quarter total acquisition costs also included an $11.2 million inventory provision for standard definition product and this year’s second quarter total acquisition costs were reduced by the $1.4 million standard definition inventory reserve release for sales of standard definition boxes during the quarter.

Our SAC in the second quarter this year was about $135 and that’s down more than $600 when compared to the second quarter of last year. On a trailing 12-month basis, our SAC was $177, declining for the third straight quarter and down year over year as we have become much more prudent with our marketing spend, even when adjusting for the inventory reserve and release.

We will continue to manage our marketing expenses aggressively. Again, it should be noted that during the holiday season, we typically spend more in absolute marketing dollars and incur higher hardware costs. This year should follow these typical patterns.

Now, turning to the guidance for the third quarter of fiscal 2009, we expect service and technology revenues to be between $49 million and $51 million. We anticipate that our technology revenue will be substantially lower -- excuse me, will be lower sequentially and that we will continue to see declines in DIRECTV sub revenue and there will be an increase in our fully amortized lifetime subscription.

Again, note our technology revenue fluctuates on a quarterly basis depending on the work that we do for [partnerships] in any one quarter.

We currently expect that our third quarter fiscal 2009 adjusted EBITDA results to be in a range of a loss of $1 million to a profit of $1 million. We expect a net loss in the range of $7 million to $9 million. It should be noted that we anticipate seasonal increases in selling activity to our retailers, hardware losses, and marketing. Additionally, we expect to incur higher costs related to our EchoStar litigation.

So to wrap up, we’re extremely pleased about the financial performance in the first half of this year. We feel we are well on our way to significantly improving our net income and our adjusted EBITDA compared to last year. Our balance sheet is improved with this quarter’s net cash positive contribution, as we have over $100 million in cash and cash equivalents at the end of the second quarter, and this was before the cash awarded in the EchoStar litigation.

Further, we will continue to be prudent in our investments and subscription acquisition costs and we will execute on our mass distribution international and advertising and other growth opportunities.

This concludes my remarks. Thanks for your time and we’ll now open it up to questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from Alan Gould, Natexis.

Derrick Nueman

Alan? Are you there? Alan, can you hear us?

Alan Gould - Natexis Bleichroeder

Hello, can you hear me? Derrick, can you hear me?

Derrick Nueman

Yeah, we can hear you, Alan.

Alan Gould - Natexis Bleichroeder

Okay, sorry. First, does the Comcast appointment still require a truck roll or have you gotten to the point where you no longer require a truck roll? And Tom, any thoughts on the Cablevision network DVR and do you think it infringes on the TiVo IP possibly?

Thomas S. Rogers

The truck roll issue, as you know, we’ve been -- designed the Comcast software upgrade to have an automatic box flip to avoid a truck roll. The work has been put in place so that the TiVo solution can work in the absence of a truck roll. There are -- there were dependencies there that were not based on TiVo's work but third party’s work and as the Comcast quote say, they are about finishing optimizing all of that, both performance and truck roll issues so that the heavy marketing should can begin to be applied. But the notion of course is that this would be out there in the absence of a need for a truck roll, at least in the vast majority of cases.

The issue of the network DVR has gotten a lot of attention, a lot of notice. Our view of that is one, there were some elements of the court of appeals ruling there which we very much agreed with that go to some copyright questions that we would certainly agree with where the court came out but having said that, our view is that there are a lot of legal issues that still need to be resolved on that front and have not by any means yet been clarified so that the rules of the road on what a network DVR can and cannot do under the copyright laws are not yet clear.

I think probably the more significant issue from a TiVo point of view is that we don’t see this ruling having anything to do with our business relationships with the cable world. We are relating to cable based on our user interface, our search, our overall consumer experience that are independent of where the storage capacity lies, be that in the home, the head end or wherever. In fact, all our work for Comcast is a server-based deployment and the recording device element of that is not the thrust of why we provide something very substantial and meaningful to cable operators.

Maybe even more meaningful in terms of the whole question being understood is that our view is that the cable industry has totally inadequate capacity at this point for broad scale deployment of a network DVR solution. For individual HD streams to be able to be sound streamed at key viewing times, such as primetime, so that substantial numbers of subscribers could be watching what they want to watch when they want to watch it is beyond the realm of most cable operators’ capacity.

Alan Gould - Natexis Bleichroeder

Thank you.

Operator

Our next question will come from Daniel Ernst with Hudson Square Research.

Daniel Ernst - Hudson Square Research

Thanks for taking the call. Two questions, if I might; first, some color on your new partner take rate, whether it’s Comcast or Cablevision in Mexico or whether it’s Seven. If you looked at your sub base, your partner’s sub base, excluding DIRECTV, you have growth year-on-year and have you seen any recent change in the rate of that growth as you’ve added new partners?

And then the second question, R&D, you spent over $50 million on a cash basis over the last four quarters. The numbers have been kind of trending up. Can you give us a sense of where the focus of your R&D dollars are going [inaudible]? Thanks.

Thomas S. Rogers

On the partner issue, we don’t break out those numbers but certainly in terms of year over year, our overall partner MSO component is up relative to where it was a year ago. We are not at a point where those partner numbers are contributing substantial growth but certainly they are up from where they were a year ago.

On the R&D front, the R&D is an element we manage very closely, very carefully. I’d say it’s fair to say that we have been deploying increasing percentages of our R&D resource to advertising and audience research, not to mention a number of areas that we are receiving reimbursement for our R&D activities from third parties such as our domestic and international mass distribution deals.

So those areas have tended to grow in terms of the overall share of our R&D expenses relative to the standalone business.

Daniel Ernst - Hudson Square Research

Thanks.

Operator

Moving on, we’ll take a question from Tony Wibel with Citigroup.

Tony Wibel - Citigroup

Good afternoon. First of all, congratulations on the EBITDA and the SAC. Tom, I was hoping you could maybe speak to what you would do with the cash that will come in the door from the DISH damages at the very least which I calculate would be about $2.00 of cash per share. And secondly, could you provide an update on where we stand with rolling out Scientific Atlantic on the DVR software for cable MSOs?

Thomas S. Rogers

On the latter point, that software, as you know, is subject to an agreement between Comcast and ourselves. It’s one of the key things we are looking to provide them. We are not at a point where we are discussing roll out but we are in the development phases of that, I think maybe even more significantly as the quote from Comcast and their look at wanting to get TiVo broadly to a true two-way middleware approach and that is something that we look to be able to do across all hardware providers, or all hardware solutions utilized by the cable industry.

On the cash front, without commenting on your calculation as to what that might mean in terms of overall cash we could receive, we are considering various options there. There are a number of proposals that investors have shared with us on increasing shareholder value, utilization for growing the company. I can’t say at this point, since it’s premature and we haven’t received the cash, that we have committed ourselves to any particular course. I will say that we like the idea that we had a quarter that was cash positive. We are a company with no debt. We are looking at having in excess of $200 million of cash resources and the combination of all those things we feel gives us the ability to drive the development areas of our business, which we think will provide the greatest growth.

Tony Wibel - Citigroup

Thanks.

Operator

Moving on, we’ll take a question from Barton Crockett with J.P. Morgan.

Barton Crockett - J.P. Morgan Chase  

Okay, great, thanks for taking the question. You know, I was wondering if you could tell us a little bit about the guidance. I mean, you guys have had basically seven of the past eight quarters you’ve substantially beaten your EBITDA guidance. The one exception was the second quarter when you had the inventory write-down of last year.

So I was wondering, when we look at that, why are we so consistently reporting numbers that are above your guidance and why shouldn’t we just assume that there’s a few million dollars of let’s call it expensive caution in the third quarter guidance you guys just issued?

Thomas S. Rogers

Well, I’m glad you asked that and I certainly don’t want you to assume that that is there. We have seasonal issues in the third quarter which include loading up the retail chain and those increased costs associated with box deployment and the increased marketing going into the holiday period certainly put pressure on our EBITDA. As Cal’s remarks indicated, there’s going to be lower technology revenues in the next quarter that we certainly have to take into account. Those fluctuate based on the load of work that we are doing in any given quarter for a number of deals, so we are not suggesting anything by way of a trend there but other than looking at how that work pans out over the current quarter and the technology revenues that we look at.

So we are trying to give as realistic a look as we can. We’ve gotten better in the more recent quarters. I won’t say going back on the history that you described but in the more recent quarters of really figuring out how to improve SAC relative to the kinds of numbers we are targeting, relying less on our own resources, relying more for the job to be done off of various deals, arrangements, marketing relationships where third-party resources are involved and we’ve -- we don’t see at this point where further efficiencies will necessarily be driven but certainly over the course of the quarter, we attempt to drive them out, so we would suggest only that what we put in front of you is quite realistic.

Barton Crockett - J.P. Morgan Chase  

Okay. Thanks a lot.

Operator

Moving on, we’ll take a question from Tuna Amobi with Standard & Poor's Equity.

Tuna Amobi - Standard & Poor's  

Hello, can you hear me? Thank you very much. A couple of questions -- I guess the first one is Tom, in your dealings with the CableLabs, it seems like there’s some potentially conflicting goals here in terms where the CableLabs is looking to go with [inaudible] and the work that you are doing with them in terms of [switch to digital]. So my sense is at some point they are going to want to ultimately migrate to set-top box platform, so in terms of that, what does that mean for you guys in terms of ultimately how the retailers and the CE manufacturers are kind of strategically positioning true two-way?

And separately on the power watch and stop watch program, as I look at the -- as I peer into some of those results, it just seems like there’s some discrepancies in terms of what the numbers are, trying to reconcile them to what the [inaudible] [at plus 3] is showing across the cable networks, across the demographic, et cetera. So is it the cast that in fact there are some discrepancies and where are those major discrepancies, if any, arising from?

And lastly, last time a subscription is fully amortized lifetime subscribers, is there any other potential obligation that you guys have to them beyond the potential ARPU impact? I’m trying to understand if there is any other impact that fully amortized lifetime subs would have on TiVo.

Thomas S. Rogers

All right. We try to limit our questions here to give everybody a chance within the timeframe but let me try to quickly go through these.

Don’t confuse our comments on true two-way and the way Comcast was referring to what they are looking to do by way of our advanced applications being available on their boxes with the retail true two-way issue. And CableLabs obviously has a role in all of these standard setting questions as it relates to advanced true two-way middleware.

We are quite comfortable that we know how to drive our applications to different kinds of middleware. We know that the industry is moving to true two-way. We are gratified that Comcast is enthusiastic in believing that they want to get us into their true two-way environment when it arrives. We do not see issues on the standards front there that would in any way cloud that cap.

The retail true two-way issue, we have agreed with the cable industry that we would look to provide a o-cap or true two-way retail device. It is something that we would like to do, meaning something that a consumer could go into any retailer and purchase and plug it into any cable system anywhere in the country and it would just work. There are a number of CEs that are focused on true-way devices. Our view is that that whole regime is going to take more time to be clarified and to get the ability for players such as ourselves to build on a national uniform homogeneous basis. We are not alone among the consumer electronics players seeing that that is going to be a slower process than the cable industry may have liked, and certainly issues that we see along the way we bring to CableLabs’ attention, although there isn't any one at this point that I would necessarily say conflicts with our objectives. I think the objectives we share are similar.

On the power watch and stop watch front, I’m not quite sure what you are referring to. Yes, there may be data sources out there which do not agree with our data sources and that’s one of the reasons our data sources have been getting the enthusiastic reception they have been. We are the only source of this kind of data -- granular, second-by-second across a vast number of channels, both on a household and a demographic basis where in DVR homes, you can precisely see what people are viewing and what they are not, specifically when it comes to commercials.

We have signed up a number of the top agencies, top marketers, top networks and it is the increased credibility of our data that is driving our traction in that field and the fact that it disagrees with some other data out there is not something which is a problem for us but is one of the things that has given us the ability to demonstrate why people need our data as a true indication of the status of DVR viewing.

On the third front, as lifetime subs become fully amortized, that’s really just an accounting issue as to how we treat that revenue for revenue recognition purposes. They continue to be subscribers by virtue of the lifetime benefits they get. There are certain variable costs associated with service support that all customers put on TiVo but they are de minimis in the scheme of what we deliver in terms of our overall service, so I wouldn’t point to anything there of a large nature that you’d have to look at.

Tuna Amobi - Standard & Poor's  

Thanks for all the color.

Operator

Moving on, we’ll take a question from Lee Westerfield with BMO Capital.

Lee Westerfield - BMO Capital

Thanks. Hopefully several but quick questions here, if I may -- Cal, first on the short-term securities, what are those invested in at the moment?

Secondly, Cal, you mentioned over $100 million in potential penalties from EchoStar. I assume that that was from the prior to August 2006 infringement, so there’s -- am I correct about this, yes/no -- an interim, then until now potential infringement as well? I think you guys may have filed that, your own brief, at least, [have got that under seal] and I just wanted to confirm that. Thank you.

Thomas S. Rogers

That sounds like you have some good company there with you, Lee.

Lee Westerfield - BMO Capital

Well, it’s the weekend before Labor Day and yes, it’s true, this is a break from vacation. Thanks.

Thomas S. Rogers

Excellent, glad to hear it. On your latter question, yes, you are correct -- the money that we were referring to in terms of additional $100 million or so coming in from EchoStar relates to that period prior to September ’06 and yes, we have filed a brief relative to additional damages for the subsequent period and calculations related to how those damages ought to be fixed. And Cal’s comment didn’t relate to that.

On the issue of where we are invested, Cal, do you want to touch on that?

Cal R. Hoagland

We have cash and cash equivalents primarily instruments that are very secure and government-backed, treasury-backed.

Lee Westerfield - BMO Capital

Gentlemen, thank you very much.

Operator

Moving on, we’ll take a question from David Miller with Caris & Company.

David Miller - Caris & Company

Cal, a couple of questions for you -- the $105 million that is sitting in escrow right now, assuming that the Supreme Court does not hear the case that EchoStar, you know, obviously they’ve appealed to the Supreme Court -- I don’t know why the Supreme Court would hear the case, there’s no legal precedent for that but assuming they don’t hear the case and you collect the $105 million, where do you bank that? I assume you bank that somewhere below the line, maybe in an other line or do you -- are you going to create a line for that? I’d just like to get some color from you as to how you are going to account for that.

And then also, fiscal Q2 hardware sales up 88% year over year. I assume that’s basically the effects of the new HD unit, or was there something else going on in the quarter? Thank you very much.

Cal R. Hoagland

In regard to where we would take the receipt of funds and place them in our financial statements, well, the actual geography hasn’t yet been fully determined with our auditors but we do know that it will be very favorable to our financial statements.

The second thing is our hardware sales were up year over year, yes by the fact that we are selling to [New England] and yes by the fact that we are also selling product for the Seven relationship.

Thomas S. Rogers

Fusion is our HD product, so the HD hardware obviously drives a higher sales number and we are delivering hardware to Australia that is also a hardware revenue item for us.

David Miller - Caris & Company

Thank you very much.

Operator

That does conclude the question-and-answer session. I would now like to turn the conference back over to you for any additional or closing remarks.

Thomas S. Rogers

Well, I appreciate everybody, a couple of days before the big Labor Day weekend, joining us here. I think overall, we feel very good about our product, that it’s the best out there and only getting better. Our cash position is strong and about to get stronger with no debt. Our strategic relationships continue to deepen, what we announced with Entertainment Weekly today a further example of that and I think all those issues together really position us for future sub growth.

We wish everybody a very happy Labor Day and talk to you soon. Thank you.

Operator

And that does conclude today’s conference. We do thank you for your participation today.

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Source: TiVo F2Q09 (Qtr End 7/31/08) Earnings Call Transcript
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