TiVo 2011 Annual Report Download - page 72

Certain payments to retailers and distributors such as market development funds and revenue share are recorded as a reduction of hardware revenues
rather than as a sales and marketing expense. TiVo's policy for revenue share payments is to reduce revenue when these payments are incurred and fixed or
determinable. TiVo reduces revenue at the later of the date at which the related hardware revenue is recognized or the date at which the market development
program is offered.
Stock-Based Compensation
The Company has equity incentive plans 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. Additionally the Company has an Employee Stock Purchase Plan (“ESPP”) which officers and employees can participate. Upon the
exercise of options, the Company issues new common stock from its authorized shares.
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 and Monte-Carlo valuation model for stock awards with
market vesting conditions. TiVo recognizes compensation expense for stock option awards on a straight-line basis over the requisite service period of the
award.
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, 2012, 2011, and 2010, this amount was
immaterial. All other marketing co-op development payments are classified as a reduction of hardware revenues. Advertising expenses were $2.5 million,
$3.8 million, and $1.6 million, of sales and marketing, subscription acquisition costs for the fiscal years ended January 31, 2012, 2011, and 2010, respectively.
Included in these advertising expenses were $2.0 million, $3.2 million, and $1.0 million, respectively, related to media placement costs.
Warranty Expense
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.
Income Taxes
The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are determined based on differences
between financial reporting and tax reporting bases of assets and liabilities and are measured using enacted tax rates and laws that are expected to be in effect
when the differences are expected to reverse. Realization of deferred tax assets is dependent upon future earnings, the timing and amount of which are
uncertain.
TiVo takes a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by
determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained upon tax authority examination,
including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50%
likely of being realized upon ultimate settlement.
The Company’s policy is to include interest and penalties related to unrecognized tax benefits, if any, within the provision for taxes in the consolidated
statements of operations.
Business Concentrations and Credit Risk
The Company’s business is concentrated primarily in the United States and is dependent on discretionary consumer spending. Continued uncertainty or
adverse changes in the economy could lead to additional significant declines in discretionary consumer spending, which, in turn, could result in further
declines in the demand for the TiVo service and TiVo-enabled DVRs. Decreases in demand for the Company’s products and services, particularly during the
critical holiday selling season, could have an adverse impact on its operating results and financial condition. Uncertainty and adverse changes in the economy
could also increase the risk of losses on the Company’s investments, increase costs associated with developing and producing its products, increase TiVo’s
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