TiVo 2006 Annual Report Download - page 27

Table of Contents
recognition and any inability to do so will adversely affect our billing and reporting. We have increasingly complex business arrangements, and the rules
which govern revenue and expense recognition in our business are increasingly complex as well. To manage the expected growth of our operations and
increasing complexity, we will need to improve our operational and financial systems, procedures and controls and continue to increase systems automation to
reduce reliance on manual operations. Any inability to do so will affect our billing and reporting. Our current and planned systems, procedures and controls
may not be adequate to support our complex arrangements and the rules governing revenue and expense recognition for our future operations and expected
growth. Delays or problems associated with any improvement or expansion of our operational and financial systems and controls could adversely affect our
relationships with our customers; cause harm to our reputation and brand; and could also result in errors in our financial and other reporting.
If we fail to adequately manage our increasingly complex licensing, development and engineering services agreements, we could be subjected to
unexpected costs and incur losses which could adversely affect our business.
We engage in licensing, development, and engineering services agreements with our customers, such as Comcast, Cox, and DIRECTV, for example.
These types of contracts are typically long-term and complex. The engineering services we agree to provide may be essential to the functionality of the
licensed software or such software may involve significant customization and modification. We believe we are able to make reasonably dependable cost
estimates based on historical experience and various other assumptions. These estimates are assessed continually during the term of the contract and revisions
are reflected when the conditions become known. Using different cost estimates related to engineering services may produce materially different results for
related expenses and revenues. A favorable change in estimates in a period could result in additional revenue and profit, and an unfavorable change in
estimates could result in a reduction of revenue and profit or the recording of a loss that would be borne solely by us. Any inability to properly manage,
estimate, and perform these development and engineering services for our customers could cause us to incur unexpected losses and reduce or even eliminate
any profit from these arrangements, and in such a case our business would be harmed.
We must manage product transitions successfully in order to remain competitive.
The introduction of a new product or product line is a complex task, involving significant expenditures in research and development, training,
promotion and sales channel development, and management of existing product inventories to reduce the cost associated with returns and slow moving
inventory. As new products are introduced, we intend to monitor closely the inventory of products to be replaced, and to phase out their manufacture in a
controlled manner. However, we cannot assure you that we will be able to execute product transitions in this manner or that product transitions will be
executed without harming our operating results. Failure to develop products with required features and performance levels or any delay in bringing a new
product to market could significantly reduce our revenues and harm our competitive position.
The product lifetime subscriptions to the TiVo service that we currently are obligated to service commit us to providing services for an
indefinite period. The revenue we generate from these subscriptions may be insufficient to cover future costs and will negatively impact our TiVo-
Owned Average Revenue per Subscription.
In the past, we offered a product lifetime subscription option to the TiVo service that committed us to provide TiVo service for as long as the DVR is in
service. We received the product lifetime subscription fee for the TiVo service in advance and amortize it as subscription revenue over four years, which is
our estimate of the service life of the DVR. If these product lifetime subscriptions use the DVR for longer than anticipated, we will incur costs such as
telecommunications and customer support costs without a corresponding subscription revenue stream and therefore will be required to fund ongoing costs of
service from other sources. Additionally, if these product lifetime subscriptions use the DVR for longer than the period in which we recognize revenue, our
average revenues per subscription (ARPU) for our TiVo-Owned subscriptions will be negatively impacted as we continue to count these customers as
subscriptions without corresponding subscription revenue thus lowering our average revenues across our TiVo-Owned subscription base. As of January 31,
2007, we had approximately 165,000 product lifetime subscriptions that had exceeded the four-year period we use to recognize product lifetime subscription
revenues and had made contact to the TiVo service within the prior six-month period. This represents approximately 23% of our cumulative lifetime
subscriptions as compared to 13% in fiscal year ended January 31, 2005. If the useful life of the recorder were shorter or longer than four-years, we would
recognize revenues earlier or later. We will continue to monitor the useful life of a TiVo-enabled DVR and the impact of higher churn, increased competition,
and compatibility of our existing TiVo units with high-definition programming. Further analysis will allow us to determine if our useful life is shorter or
longer than four-years, in which case we may revise the estimated life and we would recognize revenues from this source over a shorter or longer period.
We share a substantial portion of the revenue we generate from subscription fees with some of our retail customers and consumer electronics
companies. We may be unable to generate enough revenue to cover these obligations.
In some of our agreements, we have agreed to share a substantial portion of our subscription and other fees with some of our retail customers and
consumer electronics manufacturing companies in exchange for manufacturing, distribution and marketing support, and discounts on key components for
DVRs. These agreements require us to share substantial portions of the subscription and other fees attributable to the same subscription with multiple
companies. These agreements also require us to share a portion of our subscription fees whether or not we increase or decrease the price of the TiVo service.
If we change our subscription fees in response to competitive or other market factors, our operating results would be adversely affected. Our decision to share
subscription revenues is based on our expectation that these relationships will help us obtain subscriptions, broaden market acceptance of digital video
recorders, and increase our future revenues. If these expectations are not met, we may be unable to generate sufficient revenue to cover our expenses and
obligations.
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