TiVo 2007 Annual Report Download - page 48

Table of Contents
that we believe to be reasonable under the circumstances. The results of this analysis form the basis for our judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may materially differ from these estimates under different assumptions or conditions.
For a detailed discussion on the application of these and other accounting estimates, see Item 8. Note 2. "Summary of Significant Accounting Policies" in the
notes to our consolidated financial statements.
Recognition Period for Product Lifetime Subscriptions Revenues. From time-to-time TiVo has offered for general sale a product lifetime subscription
option for the life of the DVR for a one-time, prepaid payment. During the first quarter of fiscal year ended January 31, 2007, we discontinued general sale of
the product lifetime service option. During the fourth quarter ended January 31, 2008, we began offering product lifetime service subscriptions only to
existing customers. As of January 31, 2008, 175,000 product lifetime subscriptions have exceeded the period we use to recognize product lifetime
subscription revenues and had made contact with the TiVo service within the prior six month period. This represents approximately 26% of our cumulative
lifetime subscriptions as compared to 23% for the fiscal year ended January 31, 2007. Effective November 1, 2007, we extended the period we use to
recognize product lifetime subscription revenues from 48 months to 54 months for product lifetime subscriptions acquired on or before October 31, 2007 and
such change is being recognized on a prospective basis. This change resulted in a reduction of service revenues of $2.5 million for the quarter and fiscal year
ended January 31, 2008. Additionally, we also increased the amortization period to 60 months for new product lifetime subscriptions acquired on or after
November 1, 2007 which is currently being offered on a limited basis and primarily related to the TiVo HD DVR. The new estimates of expected lives are
dependant on assumptions with regard to future churn of the product lifetime subscriptions. During fiscal year ending January 31, 2009, we will continue to
monitor the useful life of a TiVo-enabled DVR and the impact of the differences between actual churn and forecasted churn rates. If subsequent actual
experience is not in line with our current assumptions, including higher churn of product lifetime subscriptions due to the incompatibility of our standard
definition TiVo units with high definition programming and increased competition, we may revise the estimated life which could result in the recognition of
revenues from this source over a longer or shorter period.
Engineering Services Project Cost Estimates. We recognize revenues for software engineering services that are essential to the functionality of the
software or involve significant customization or modification using the percentage-of-completion method, as described in Statement of Position (SOP) 81-1
"Accounting for Performance of Construction-Type and Certain Production-Type Contracts." We recognize revenue by measuring progress toward
completion based on the ratio of costs incurred, principally labor, to total estimated costs of the project, an input method. In general, these contracts are long-
term and complex. We believe we are able to make reasonably dependable estimates based on historical experience and various other assumptions that we
believe to be reasonable under the circumstances. These estimates include forecasting of costs and schedules, projecting cost to complete, tracking progress of
costs incurred to date, and projecting the remaining effort to complete the project. Costs included in engineering services are labor, materials, and overhead
related to the specific activities that are required for the project. Costs related to general infrastructure or platform development are not included in the
engineering services project cost estimates. These estimates are assessed continually during the term of the contract and revisions are reflected when the
conditions become known. In some cases, we have accepted engineering services contracts that were expected to be losses at the time of acceptance.
Provisions for all losses on contracts are recorded when estimates determine that a loss will be incurred on a contract. Using different cost estimates, or
different methods of measuring progress to completion, engineering services revenues and expenses may produce materially different results. 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 profit or the
recording of a loss that would be borne solely by TiVo. For the fiscal year ended January 31, 2008 the majority of our technology revenues are related to
Comcast and international development agreements.
Valuation of Inventory. We value inventory at the lower of cost or market with cost determined on the first-in, first-out method. We base write-downs
of inventories upon current facts and circumstances and determine net realizable value on an aggregate pool basis (DVR type). We perform a detailed
assessment of excess and obsolete inventory and purchase commitments at each balance sheet date, which includes a review of, among other factors, demand
requirements and market conditions. Based on this analysis, we record adjustments, when appropriate, to reflect inventory of finished products and materials
on hand at lower of cost or market and to reserve for products or materials which are not forecasted to be used. We also record accruals for charges that
represent Management's estimate of the Company's exposure to the contract manufacturer for excess non-cancelable purchase commitments. Although we
make every effort to ensure the accuracy of our forecasts of product demand and pricing assumptions, any significant unanticipated changes in demand,
pricing, or technological developments would significantly impact the value of our inventory and our reported operating results. If we find that our estimates
are too optimistic and determine that our inventory needs to be written down further, we will be required to recognize such costs in
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