TiVo 2011 Annual Report Download - page 54

Table of Contents
our sales volume increased due to the launch of our new TiVo Premiere boxes and purchases of the TiVo Premiere boxes by MSOs such as RCN and others.
Cost of service revenues.
Fiscal Year Ended January 31,
2012 2011 2010
(In thousands, except percentages)
Cost of service revenues $ 35,865 $ 40,515 $ 40,878
Change from same prior year period (11)% (1)% (8)%
Percentage of service revenues 27 % 29 % 26 %
Service gross margin $ 95,476 $ 100,134 $ 118,894
Service gross margin as a percentage of service revenues 73 % 71 % 74 %
Cost of service revenues consists primarily of telecommunication and network expenses, employee salaries, service center, credit card processing fees,
and other expenses related to providing the TiVo service. Cost of service revenues decreased by $4.6 million for the fiscal year ended January 31, 2012, as
compared to the same prior year period. This decrease in cost of service revenues was largely related to lower call center service costs as we continued our
efforts to efficiently manage our customer service-related expenditures.
For the fiscal year ended January 31, 2011, cost of service revenues remained relatively flat, as compared to the same prior year period.
Cost of technology revenues.
Fiscal Year Ended January 31,
2012 2011 2010
(In thousands, except percentages)
Cost of technology revenues $ 23,056 $ 18,813 $ 20,703
Change from same prior year period 23% (9)% 68%
Percentage of technology revenues 39% 69 % 69%
Technology gross margin $ 35,889 $ 8,528 $ 9,204
Technology gross margin as a percentage of technology revenues 61% 31 % 31%
Cost of technology revenues includes costs associated with our development work primarily for DIRECTV, Virgin, and our other international and
domestic projects. The increase of $4.2 million in cost of technology revenues in the fiscal year ended January 31, 2012 related to an increase in the number
of customers we were performing development work for in the current year period as compared to the same prior year period.
The decrease of $1.9 million in cost of technology revenues for the fiscal year ended January 31, 2011, as compared to the same prior year period is
largely due to the fact that some of our newer deployment arrangements such as Virgin provide for lower or later funding of the development effort and we
recognize cost of revenue in these arrangements only after we have the contractual right to invoice the customer and recognize the associated revenues. Also,
the amounts paid by DIRECTV and attributable to development efforts are lower in fiscal year 2011 compared to the same prior year period.
The increase in technology gross margin for the fiscal year ended January 31, 2012 as compared to the same prior year periods is primarily due to the
revenue recognized from our DISH and AT&T agreements as most of our newer deployment arrangements such as Virgin are accounted for under a zero
margin method during the development period and also during the post-launch period until all deferred development costs are recovered.
In certain of our distribution deals, such as Virgin, TiVo is not being paid in full for the upfront development cost. However, in exchange, TiVo is
receiving guaranteed financial commitments over the duration of the distribution deal. If we are reasonably assured that these arrangements as a whole will be
profitable (assuming successful completion of development), we do not expense the development costs that exceed cash payable for the development work as
incurred but rather we defer those costs and recognize these costs later when we receive service fees. However, despite the deferral of these development
costs, we do incur cash outflows associated with these development efforts resulting in potentially higher cash usage in the near term. As a result, a portion of
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