TiVo 2008 Annual Report Download - page 53

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Table of Contents
Cost of hardware revenues.
Fiscal Year Ended January 31,
2009 2008 2007
(In thousands, except percentages)
Cost of hardware revenues $ 57,742 $ 92,052 $ 112,505
Change from same prior year period -37% -18% 29%
Percentage of hardware revenues 140% 220% 271%
Hardware gross margin $ (16,609) $ (50,254) $ (70,917)
Hardware gross margin as a percentage of hardware revenue -40% -120% -171%
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
sell this hardware as a means to grow our service revenues and, as a result, do not intend to generate positive gross margins from these hardware sales. During
the fiscal year ended January 31, 2009 we sold approximately 71,000 fewer TiVo DVR's as compared to the prior fiscal year.
During the fiscal year ended January 31, 2009, hardware gross margin loss improved by $33.6 million, as compared to the prior fiscal year largely due
to the mix of products sold during the year. Additionally impacting the gross margin improvement was the utilization of previously reserved inventory of $4.9
million compared to $5.9 million inventory charge during the fiscal year ended January 31, 2008 which was compounded by a barter transaction we entered
into exchanging TiVo Series2TM standard definition DVR inventory with a net book value of $2.8 million for barter credits. The barter credits were valued at
the fair value of the inventory exchanged, which was determined to be $1.8 million, which resulted in an additional negative $1.0 million hardware gross
margin.
Also, during the fiscal year ended January 31, 2009 we received a higher average selling price per DVR as compared to the same prior year period, due
to the introduction of our TiVo HD DVR at the end of the quarter ended July 31, 2007, which had a higher relative margin as compared to our TiVo Series2TM
DVR. Our rebates and revenue share costs, which are netted against our hardware revenues, also declined during the year as we currently offer no rebates on
our TiVo HD DVR and we terminated our other rebate programs on August 30, 2008. Although we continue to offer revenue share and other hardware
subsidies to certain retailers, our direct sales for our HD DVR involve no hardware subsidies. As a result of these items, the hardware gross margin loss for
the fiscal year ended January 31, 2009 decreased by approximately 67%. As of January 31, 2009, we maintained a $3.6 million inventory reserve as a result of
prior inventory impairment charges. In accordance with Staff Accounting Bulletin (SAB) Topic 5-BB and Accounting Research Bulletin (ARB) 43 Chapter 4,
Inventory Pricing, even if our current sales projections exceed our original projections, the inventory reserves are not reversed until the previously impaired
inventory is sold or scrapped. We expect to further benefit from reversals of these reserves during fiscal 2010, however to much lesser extent than in fiscal
2009.
During the fiscal year ended January 31, 2008, we sold approximately 192,000 fewer TiVo DVRs as compared to the fiscal year ended January 31,
2007. The TiVo DVR units sold in the fiscal year ended January 31, 2008 were more expensive to manufacture and were sold at a higher average selling price
due to the introduction of our TiVo HD DVR. Additionally our rebates and revenue share costs declined during this year as we did not offer rebates on our
TiVo HD DVR. This resulted in a 50% decrease in hardware gross margin loss, as a percentage of hardware revenue, for the fiscal year ended January 31,
2008 as compared to the same prior year period. Additionally, during the quarter ended July 31, 2007 the Company recorded an impairment charge of $11.2
million to cost of hardware revenues for inventory on hand and for excess non-cancelable purchase commitments. During the six month period ended
January 31, 2008, $4.8 million of this charge was offset by sales of the previously written down inventory.
Research and development expenses.
Fiscal Year Ended January 31,
2009 2008 2007
(In thousands, except percentages)
Research and development expenses $ 62,083 $ 58,780 $ 50,728
Change from same prior year period 6% 16% 23%
Percentage of net revenues 25% 22% 20%
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