TiVo 2007 Annual Report Download - page 52

Table of Contents
Cost of technology revenues.
Fiscal Year Ended January 31,
2008 2007 2006
(In thousands, except percentages)
Cost of technology revenues $ 17,367 $ 16,849 $ 782
Change from same prior-year period 3% 2055% -88%
Percentage of technology revenues 90% 92% 28%
Technology gross margin $ 2,015 $ 1,560 $ 2,015
Technology gross margin as a percentage of technology revenue 10% 8% 72%
Cost of technology revenues increased by 3% or $518,000, as compared to the same prior year period. This increase in cost of technology revenues is
related to new development work primarily for our new international projects.
The increases in costs of technology revenues from the fiscal year ended January 31, 2006 to the fiscal year ended January 31, 2007 were related to the
Comcast development agreement and were offset by an equal amount of development revenue recognized as technology revenues.
Cost of hardware revenues.
Fiscal Year Ended January 31,
2008 2007 2006
(In thousands, except percentages)
Cost of hardware revenues $ 91,918 $ 112,212 $ 86,817
Change from same prior-year period -18% 29% -28%
Percentage of hardware revenues 220% 270% 309%
Hardware gross margin $ (50,120) $ (70,624) $ (58,679)
Hardware gross margin as a percentage of hardware revenue -120% -170% -209%
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. While
we sold approximately 192,000 fewer TiVo DVR's this year as compared to the fiscal year ended January 31, 2007, the TiVo DVR units sold this year 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 currently offer no 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. Should our standard definition product continue to sell at a level that is better than originally anticipated at the time the
inventory related charges were recorded in the upcoming year, our hardware gross margin may also benefit in the fiscal year ending January 31, 2009.
The decrease in hardware gross margin loss, as a percentage of hardware revenue for the fiscal year ended January 31, 2007 was due primarily to the
adoption of a new multi-tiered pricing and bundled sales model in our direct sales channel which resulted in increased hardware revenues of $13.5 million.
This increase was more than offset by increased cost of hardware revenues of $25.4 million, resulting in an increased gross margin loss, of $11.9 million in
terms of absolute dollars. For the fiscal year ended January 31, 2007 we sold more DVR units into the retail channel than in the prior fiscal year, largely due
to the new TiVo Series2 DT and TiVo Series3 HD DVR models that were launched during the fiscal year. While these new models generated higher
revenues, they also had higher per unit costs.
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