TiVo 2006 Annual Report Download - page 56

Table of Contents
• Hardware Revenues. Hardware revenues, net of allowance for sales returns, for the fiscal year ended January 31, 2007 was 34% of our net
revenues compared to 37% for the prior fiscal year. The increase in hardware revenues in absolute dollars is attributed to increased sales to our
new and existing retail channel customers and the rollout of our new TiVo Series2 DT and TiVo Series3 HD DMR models, which was partially
offset by lower hardware prices under our bundled sales programs. For the fiscal year ended January 31, 2006, hardware revenues were 37% of
our net revenues compared to 65% for the prior fiscal year. For the fiscal year ended January 31, 2006, the decrease in hardware revenues was
largely a result of decreased hardware sales volume due to increased competition from DIRECTV's TiVo products, as well as from other DVR
distributors' and cable and service providers. Additionally, the average selling price has declined year-over-year due to consumer incentive
programs, including one program which offered a free DVR with the purchase of an annual or product lifetime product subscription.
For the fiscal years ended January 31, 2007, 2006, and 2005, one retail customer generated $30.5 million, $31.7 million, and $49.5 million of
hardware revenues or 12%, 44%, and 29% of net revenues, respectively.
• Rebates, revenue share, and other payments to channel. We recognize certain marketing-related payments as a reduction of revenues in our
consolidated statements of operations. These reductions are recorded based on an estimated potential liability for our consumer rebate program,
which is based on the percentage of customers that were reimbursed for the rebate for similar past programs and then we adjust estimates to
reflect actual redemptions. Rebates, revenue share, and other payments to channel increased by $1.1 million or 2% for the fiscal year ended
January 31, 2007 as compared to the same prior year period. In the fiscal year ended January 31, 2007, we had an increase of $4.8 million in
rebate expense due to higher hardware rebates amounts offered and an increased redemption rate. This increase was largely offset by a decrease
of $1.8 million in marketing development funds and $1.9 million in TiVo rewards expense. For the fiscal year ended January 31, 2006, rebates,
revenue share, and other payments to channel decreased by $7.7 million, as compared to the same prior fiscal year period. The primary
contributor to the decrease in rebates, revenue share, and other payments to channel for the fiscal year ended January 31, 2006 as compared to the
prior fiscal year was lower than expected rebate expenses due to fewer programs offered in the first half of fiscal year 2006. In addition, we had a
reversal of $7.7 million of rebate expense during the six months ended July 31, 2005, which was primarily a result of a truing up the rebate
accruals established in fiscal year 2005, for certain rebate programs that ended during the three months ended April 30, 2005. Consumer rebate
expenses were $29.5 million, $24.7 million, and $37.1 million for the fiscal years ended January 31, 2007, 2006, and 2005, respectively. For the
fiscal year ending January 31, 2008, we plan to lower our consumer hardware rebate offerings thereby reducing our rebates, revenues share and
other payments to channel.
Cost of service and technology revenues.
Fiscal Year Ended January 31,
2007 2006 2005
(In thousands, except percentages)
Cost of service revenues $ 43,328 $ 34,179 $ 29,360
Cost of technology revenues $ 16,849 $ 782 $ 6,575
Cost of service and technology revenues $ 60,177 $ 34,961 $ 35,935
Change from same prior-year period 72% -3% 15%
Percentage of service and technology revenues 28% 20% 31%
Service gross margin $ 155,596 $ 133,015 $ 77,806
Technology gross margin $ 2,212 $ 2,883 $ 1,735
Service gross margin as a percentage of service revenue 78% 80% 73%
Technology gross margin as a percentage of technology revenue 12% 79% 21%
Costs of service and technology revenues consist primarily of telecommunication and network expenses, employee salaries, call center, credit card
processing fees, and other expenses related to providing the TiVo service. Also included are expenses related to providing engineering services to
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