TiVo 2007 Annual Report Download - page 69

Table of Contents
and prepaid programs, revenue was recognized ratably over the subscription period and was classified as Service Revenue in the accompanying consolidated
statements of operations. However, as of the quarter ended July 31, 2006, the bundled sales programs had met the requirements for separation under EITF
00-21 since TiVo had sufficient data to support fair value for the subscription element in the arrangement. As a result, for these bundled programs, revenue is
now allocated between hardware revenue for the DVR and service revenue for the subscription using the residual value method, with the DVR revenue
recognized upon delivery and the subscription revenue being initially deferred and recognized over the term of the service commitment.
Stock-Based Compensation
The Company has equity incentive plans and an Employee Stock Purchase Plan (ESPP), under which officers, employees, consultants, and non-
employee directors may be granted options to purchase shares of the Company's authorized but unissued or reacquired common stock, and may also be
granted restricted stock, performance based stock options and other stock awards. Currently, the Company grants options from (1) the 1999 Equity Incentive
Plan, under which options could be granted to all employees, including executive officers; and (2) the 1999 Non-Employee Directors' Stock Option Plan,
under which options are granted automatically to non-employee directors. In addition, TiVo's stock option program includes the 1997 Equity Incentive Plan,
from which the Company currently does not grant options. Upon the exercise of options, the Company issues new common stock from its authorized shares.
On February 1, 2006, the Company adopted the provisions of SFAS 123R, "Share-Based Payment", requiring TiVo to recognize expense related to the
fair value of the Company's stock-based compensation awards. SFAS No. 123R eliminates the option to account for stock-based compensation transactions
with employees using the intrinsic value method under Accounting Principle Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees", and
instead requires that such transactions be accounted for using a fair-value based method.
TiVo elected to use the modified prospective transition method as permitted by SFAS 123R and therefore has not restated the Company's financial
results for prior periods. Under this transition method, stock-based compensation expense for the year ended January 31, 2007 includes compensation expense
for all stock-based compensation awards granted prior to, but not yet vested as of February 1, 2006, based on the grant date fair value estimated in accordance
with the original provisions of SFAS 123. Stock-based compensation expense for all stock-based compensation awards granted or modified subsequent to
February 1, 2006 was based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R.
The fair value of TiVo's restricted stock awards is calculated based on the fair market value of the Company's stock at the grant date. The fair value of
TiVo's stock options and ESPP awards is estimated using a Black-Scholes option valuation model. TiVo recognizes compensation expense for stock option
awards on a straight-line basis over the requisite service period of the award.
Research and Development
Research and development expenses, which consist primarily of employee salaries, related expenses, and consulting fees, are expensed as incurred.
Advertising Costs
The Company expenses advertising costs related to its products and service as incurred. Marketing co-op development payments, where the Company
receives, or will receive, an identifiable benefit (goods or services) in exchange for the amount paid to its customer, and the Company can reasonably estimate
the fair value of the benefit it receives, are classified as marketing expense. For the fiscal years ended January 31, 2008, 2007, and 2006, this amount was
immaterial. All other marketing co-op development payments are classified as a reduction of hardware revenues. Advertising expenses were 34%, 17%, and
13% or $27.9 million, $15.9 million, and $10.4 million of total acquisition costs for the fiscal years ended January 31, 2008, 2007, and 2006, respectively.
Included in these advertising expenses are $21.0 million, $12.8 million, and $7.9 million, respectively, related to media placement costs.
Warranty Expense and Liability
The Company accrues for the expected material and labor costs required to provide warranty services on its hardware products. The Company's
warranty reserve liability is calculated as the total volume of unit sales over the warranty period, multiplied by the expected rate of warranty returns (based on
historical experience) multiplied by the estimated cost to replace or repair the customers' product returns under warranty.
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