TiVo 2006 Annual Report Download - page 78

Table of Contents
recognizes revenue using the percentage-of-completion method, as described in SOP 81-1 "Accounting for Performance of Construction-Type and Certain
Production-Type Contracts," if the Company believes it is able to make reasonably dependable estimates of the extent of progress toward completion. The
Company measures progress toward completion using an input method based on the ratio of costs incurred, principally labor, to date to total estimated costs of
the project. These estimates are assessed continually during the term of the contract, and revisions are reflected when the changed conditions become known.
In some cases, the Company accepted engineering services contracts that were expected to be losses at the time of acceptance in order to gain experience in
developing new technology that could be used in future products and services. Provisions for losses on contracts are recorded when estimates indicate that a
loss will be incurred on a contract. In some cases, it may not be possible to separate the various elements within the arrangement due to a lack of VSOE for
undelivered elements in the contract. In these situations, provided that the Company is reasonably assured that no loss will be incurred under the arrangement,
the Company recognizes revenues and costs based on a zero profit model, which results in the recognition of equal amounts of revenues and costs, until the
engineering professional services are complete. Thereafter, any remaining revenue is recognized over the period of the maintenance and support or other
services that are provided.
Hardware Revenues. For product sales to distributors, revenues are recognized upon product shipment to the distributors or receipt of the
products by the distributor, depending on the shipping terms, provided that all fees are fixed or determinable, evidence of an arrangement exists and
collectibility is reasonably assured. End users have the right to return their product within 30 days of the purchase. TiVo establishes allowances for expected
product returns in accordance with SFAS No. 48, "Revenue Recognition When Right of Return Exists". These allowances are recorded as a direct reduction of
revenues and accounts receivable. For direct product sales to end-users prior to March 15, 2006, hardware revenues were recognized upon shipment by TiVo
to the end-users provided all appropriate revenue recognition criteria were met. After March 15, 2006, the Company began selling DVRs and service directly
to end-users through Bundled Sales Programs – see Bundled Sales Programs.
Bundled Sales Programs. Prior to March 15, 2006, the Company sold DVRs directly to end-users for no cost or at a substantial discount when
bundled with a gift subscription contract under certain marketing or promotion programs. These were considered multiple element arrangements, which met
the requirements for separation under Emerging Issues Task Force (EITF) 00-21, "Revenue Arrangements with Multiple Deliverables." The prepaid fee was
allocated to the hardware and service based on their relative fair values and recognized in accordance with the respective accounting policies stated above.
Beginning on March 15, 2006, the Company began selling the DVR and service directly to end-users through bundled sales programs through the
TiVo website. Under these bundled programs, the customer receives a DVR and commits to a minimum subscription of one to three years. Unlike the bundled
sales programs offered prior to March 15, 2006, the customer receives a TiVo DVR and has the option to either pay a monthly fee over the subscription term
(monthly program) or to prepay the subscription fee in advance (prepaid program). After the initial committed subscription term, the customer has various
pricing options at which they can renew the subscription. During the quarter ended April 30, 2006, these bundled sale programs did not meet the requirements
for separation under EITF 00-21 because the Company did not have fair value for the undelivered subscription element. As a result, for both the monthly and
prepaid programs, revenue was recognized ratably over the subscription period and was classified as Service Revenue in the accompanying consolidated
statements of operations. However, as of the quarter ended July 31, 2006, the bundled sales programs had met the requirements for separation under EITF
00-21 since TiVo had sufficient data to support fair value for the subscription element in the arrangement. As a result, for these programs or for monthly
packages with a hardware upgrade fee, revenue is now allocated to the DVR (limited to the extent of the non-contingent amount) and subscription based on
the residual value method, with the DVR revenue recognized upon delivery and the subscription revenue being initially deferred and recognized over the term
of the service commitment.
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