TiVo 2004 Annual Report Download - page 64

Table of Contents
Index to Financial Statements
Revenue Recognition and Deferred Revenue
During the fiscal years ended January 31, 2005, 2004, and 2003 the Company generated service revenues from fees for providing the TiVo service to
consumers. The Company also generated technology revenues from providing licensing and engineering professional services to other entities that were
creating products that provide DVR functionality. In addition, in an effort to increase its subscription growth, the Company manufactured and distributed
TiVo branded DVRs. This effort resulted in revenues from the sale of hardware products that enable the TiVo service.
Service Revenues. Included in service revenues are revenues from monthly and annual subscription fees to the TiVo service. These subscription
revenues are recognized over the period benefited. Subscription revenues from product lifetime subscriptions are recognized ratably over a four-year period,
the Company's estimate of the useful life of the DVR.
Technology Revenues. The Company recognizes technology revenues under technology license and engineering professional services agreements in
accordance with the American Institute of Certified Public Accountant's Statement of Position ("SOP"), 97-2, "Software Revenue Recognition," as amended.
These agreements contain multiple-elements in which vendor specific objective evidence ("VSOE") of fair value is required for all undelivered elements in
order to recognize revenue related to the delivered element. Elements included in the Company's arrangements may include technology licenses and
associated maintenance and support, engineering professional services and other services. The timing of revenue recognition related to these transactions will
depend, in part, on whether the Company can establish VSOE for undelivered elements and on how these transactions are structured. As such, revenue
recognition may not correspond to the timing of related cash flows or the Company's work effort.
In arrangements which include engineering professional services that are essential to the functionality of the software or involve significant
customization or modification of the software, the Company 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 based on the ratio of costs incurred to
date to total estimated costs of the project, an input method. These estimates are assessed continually during the term of the contract and revisions are
reflected when the conditions become known. In some cases, the Company has accepted engineering professional 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 all
losses on contracts are recorded when estimates indicate that a loss will be incurred on a contract. If the Company is not able to estimate total project
revenues, total costs, or progress toward completion, but is able to estimate that no loss will be incurred on an arrangement, the Company recognizes revenue
to the extent of incremental direct costs until the engineering professional services are complete. Thereafter, any remaining revenue is recognized over the
period the maintenance and support or other services are provided.
Hardware Revenues. The Company recognizes hardware revenues, net of an allowance for sales returns, from the sales of its TiVo-enabled DVRs.
Hardware revenues are recognized upon shipment to consumers or upon delivery to retail customers. The fees for shipping and handling paid by customers
are recognized as hardware revenues. The costs associated with shipping and handling these DVRs are expensed as cost of hardware revenues.
Rebates, Revenue Share, and Other Payments to Channel. In accordance with Emerging Issues Task Force (EITF) 01-09, "Accounting for
Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendors Products)", certain payments to customers such as market development
funds and revenue share are shown as a reduction to revenue rather than as a sales and marketing expense. These payments are classified as "rebates, revenue
share, and other payments to channel." The Company's policy is to expense customer payments when they are fixed and determinable. The Company
expenses such costs as incurred.
Deferred Revenues. Deferred revenues consists of unrecognized service and technology fees that have been collected, however the related service has
not yet been provided or VSOE of fair value does not exist for the undelivered elements of an arrangement.
Research and Development
Research and development expenses consist primarily of employee salaries, related expenses, and consulting fees relating to the development of the
TiVo service platform and products that enable the TiVo service. Research and development costs are expensed as incurred.
Sales and Marketing
Sales and marketing expenses consist primarily of employee salaries and related expenses, media advertising, public relations activities, special
promotions, trade shows, and the production of product related items, including collateral and videos. Additionally, included are sales and marketing expenses
that consist of cash and non-cash charges related to the Company's agreements with related parties.
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