TiVo 2004 Annual Report Download - page 29

Table of Contents
Index to Financial Statements
period due to an increased level of staffing as a result of TiVo's increased focus on issues of customer care and retention. We expect to continue to increase
customer care center expenses for fiscal year 2006 as we strive to continue to improve customer retention. Additionally, technology license fees increased by
269% or by $1.6 million for the fiscal year ended January 31, 2005. Also, telecommunication and network expenses related to providing the TiVo service
increased by 51% or by $1.6 million for the fiscal year ended January 31, 2005. Cost of service revenues for the fiscal year ended January 31, 2004 increased
modestly compared to the prior fiscal year.
Cost of technology revenues decreased by 52% for the fiscal year ended January 31, 2005 as compared to the prior-year period. This decrease was
largely due to fewer contracts requiring deployment of engineers from research and development activities. Additionally contributing to the decrease were
lower provisions for losses on contracts related to providing engineering professional services to customers under agreements for which expenses exceeded
the budgeted revenues. As a result of the decline in technology revenues and an adjustment to one contract's cost estimate, technology revenues gross margin
was $1.7 million for the fiscal year ended January 31, 2005 as compared to $2.2 million for the prior fiscal year. Cost of technology revenues increased by
69% or $5.6 million for the fiscal year ended January 31, 2004 as compared to the prior fiscal year. This increase was due to increased expenses related to
providing engineering professional services to two customers under agreements for which expenses exceeded the budgeted revenues.
Cost of hardware revenues.
Fiscal Year Ended January 31,
2005
2004 2003
(In thousands, except percentages)
Cost of hardware revenues $ 120,323 $ 74,836 $ 44,647
Change from prior fiscal year 61% 68% NM
Percentage of hardware revenues 108% 103% 98%
Hardware gross margin (9,048) (1,954) 973
Hardware gross margin as a percentage of hardware revenues (8)% (3)% 2%
Costs of hardware revenues include all product costs associated with the TiVo-enabled DVRs we distribute and sell, including manufacturing-related
overhead and personnel, warranty, certain licensing, order fulfillment, and freight costs. We engage a contract manufacturer to build TiVo-enabled DVRs. We
have engaged in the manufacturing and the sale of hardware as a means to grow our service revenues and, as a result, do not intend to generate significant
gross margins from these hardware sales. The increase in sales volume was the primary reason for the increase in the cost of hardware revenues. Cost of
hardware revenues for the fiscal year ended January 31, 2005 and 2004 increased 61% and 68%, respectively, as compared to the prior fiscal year primarily as
a result of the increased overall sales volume of DVRs sold to retailers during this period as compared to the prior-year period. We believe the volume has
increased because of our significant investment during this fiscal year in our subscription acquisition activities. Our hardware gross margin has continued to
decline due to price reductions introduced in fiscal year 2005 and the shift in the mix of products to lower average selling price products. We expect that the
cost of hardware revenues will change as sales volumes change.
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