TiVo 2011 Annual Report Download - page 52

Table of Contents
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.
Deployment Arrangements Cost Estimates. We enter into deployment agreements with MSOs, which typically include software customization and set
up services, limited training, PCS, TiVo-enabled DVRs, non-DVR STBs, and TiVo service. We usually incur development cost for which we are in total or in
part compensated through service fees received after a solution launch. When we are reasonably assured that these upfront development costs are recoverable,
we defer such cost and recognize them after the launch of the solution. The assessment of recoverability is highly dependent on our estimates of engineering
costs related to the project. We also recognize revenues for certain software engineering services that are essential to the functionality of the software or
involve significant customization or modification using the percentage-of-completion method. 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. 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, tracking progress of costs incurred to date, and projecting the remaining effort to complete the
project. Costs included in project costs are labor, materials, and overhead related to the specific activities that are required for the project. Costs related to
general infrastructure or uncommitted platform development are not included in the project cost estimates. These estimates are assessed continually during the
term of the contract and revisions are reflected when the conditions become known. Using different cost estimates, or different methods of measuring progress
to completion, engineering services revenues and expenses may produce materially different results or development costs may not be deemed recoverable. A
favorable change in estimates in a period could result in additional 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 including a write-off of development costs that were incurred in prior periods and previously deferred
because they were previously deemed recoverable. See also the discussions under the heading “Risk Factors - Risks Related to Our Business - If we fail to
properly estimate, manage, and perform the development and engineering services for our television service provider customers, we could incur additional
unexpected expenses and losses which could reduce or even eliminate any profit from these deployment arrangements, in which case our business would be
harmed.” For the fiscal year ended January 31, 2012, the majority of our technology revenues (after excluding revenues from our licensing agreement with
DISH Network and AT&T Inc.) were related to DIRECTV and Virgin Media (United Kingdom).
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 our 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, we will be required to recognize such costs in our cost of revenue at the time of such
determination. Conversely, if we find our estimates are too pessimistic and/or circumstances beyond our control change and we subsequently sell product that
has previously been written down, our gross margin in the period of sale will be favorably impacted.
Recent Accounting Pronouncements
In June 2011, the FASB issued an amendment to an existing accounting standard which requires companies to present net income and other
comprehensive income in one continuous statement or in two separate, but consecutive, statements. In addition, in December 2011, the FASB issued an
amendment to an existing accounting standard which defers the requirement to present components of reclassifications of other comprehensive income on the
face of the income statement. We will adopt both standards in the first quarter of fiscal year 2013.
In May 2011, the FASB issued a new accounting standard update, which amends the fair value measurement
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