TiVo 10-K 2017
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
For the fiscal year ended December 31, 2016
For the transition period from to
Commission file number: 001-37870
(Exact name of registrant as specified in its charter)
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
The aggregate market value of voting and non-voting common equity held by non-affiliates of the Registrant was approximately $1,244.5 million as of June 30, 2016, based on the closing price on the NASDAQ Global Select Market reported for such date. This calculation does not reflect a determination that certain persons are affiliates of the Registrant for any other purpose. The number of shares of the Registrant's Common Stock outstanding on February 10, 2017 was 120.9 million shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement related to the 2017 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission within 120 days after December 31, 2016, are incorporated by reference into Part III of this Annual Report on Form 10-K.
TIVO CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
This Annual Report on Form 10-K for TiVo Corporation (the “Company,” “we” or “us”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities and Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, including the discussion contained in Item 7., "Management’s Discussion and Analysis of Financial Condition and Results of Operations." We have based these forward-looking statements on our current expectations and projections about future events or future financial performance, which include implementing our business strategy, successfully integrating Rovi Corporation ("Rovi") and TiVo Inc. (renamed TiVo Solutions Inc. (“TiVo Solutions”) following our acquisition of TiVo Solutions on September 7, 2016) (the "TiVo Acquisition"), realizing planned synergies and cost-savings associated with the TiVo Acquisition, developing and introducing new technologies, obtaining, maintaining and expanding market acceptance of the technologies we offer, successfully renewing intellectual property licenses with the major North American service providers and competition in our markets.
In some cases, these forward-looking statements can be identified by terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “future,” “predict,” “potential,” “intend,” or “continue,” and similar expressions. These statements are based on the beliefs and assumptions of our management and on information currently available to our management. Our actual results, performance and achievements may differ materially from the results, performance and achievements expressed or implied in such forward-looking statements. For a discussion of some of the factors that might cause such a difference, see the "Risk Factors" contained in Part I, Item 1A. of this Annual Report on Form 10-K. Except as required by law, we specifically disclaim any obligation to update such forward-looking statements.
ITEM 1. BUSINESS
On September 7, 2016 (the "TiVo Acquisition Date"), Rovi Corporation completed its acquisition of TiVo Inc. (renamed TiVo Solutions Inc. ("TiVo Solutions") on September 7, 2016) for $1.1 billion (the "TiVo Acquisition"). The TiVo Acquisition created a new company, TiVo Corporation ("TiVo"), which is a global leader in media and entertainment products that power consumer entertainment experiences and enable its customers to deepen and further monetize their audience relationships. We provide a broad set of intellectual property, cloud-based services and set-top box solutions that enable people to find and enjoy online video, television, movies and music entertainment, including content discovery through device embedded and cloud-based interactive program guides (“IPGs”), digital video recorders ("DVRs"), natural language voice and text search, cloud-based recommendations services and our extensive entertainment metadata (i.e., descriptive information, promotional images or other content that describes or relates to television shows, videos, movies, sports, music, books, games or other entertainment content).
We offer our portfolio of products as both discrete component technologies for our customers to integrate into their internally developed solutions or as part of completely integrated modular solutions. Our integrated platform includes software and cloud-based services that provide an all-in-one approach for navigating a fragmented universe of content by seamlessly combining live, recorded, video-on-demand ("VOD") and over-the-top ("OTT") (e.g., Netflix, Amazon Video, Hulu, VUDU and YouTube, among others) content into one intuitive user interface with simple universal search, discovery, viewing and recording, to create a unified viewing experience. We distribute our products through our service provider relationships, integrated into third party devices and directly to retail consumers.
We also offer data analytics solutions, including advertising and programming promotion optimizers, which enable advanced audience targeting in linear television advertising. Our solutions are sold globally to cable, satellite, consumer electronics, entertainment, media and online distribution companies, and, in the United States, we sell a suite of DVR and whole home media products and services directly to retail consumers.
Our products and innovations are protected by broad portfolios of licensable technology patents. These portfolios cover many aspects of content discovery, DVR, VOD and OTT experiences, multi-screen viewing, mobile device video experiences, entertainment personalization, interactive applications, data analytics solutions and advertising. We license our patent portfolios for use with linear broadcast television and, as the industry extends into new video services through internet technologies, for use with connected televisions, personal computers, video game consoles, media streaming and mobile devices. We believe that an ongoing marketplace transition toward mobile viewing and device proliferation presents further opportunity to extend our patent licensing programs for new use cases and additional customer verticals.
We are industry pioneers having invented the IPG and the DVR. Today, we continue our strong focus on innovation with new advanced solutions for unified viewing of internet video and pay TV, cutting edge natural language voice enabled technologies, entertainment personalization, audience management and viewership prediction solutions. Building on this foundation, we have established broad industry relationships with the companies leading the next generation of digital entertainment. Our strategy includes developing complementary products, services and intellectual property to address the opportunities presented by this industry transformation.
For financial reporting purposes, our business is organized in two segments: Intellectual Property Licensing and Product. See Notes 14 and 15 to the Consolidated Financial Statements included in Part IV of this Annual Report on Form 10-K, which is incorporated by reference herein, for additional information related to our segments and geographies, respectively.
Fragmentation. The entertainment marketplace is transforming as content moves from traditional broadcast distribution methods to distribution and delivery over the internet. The consumer entertainment experience is increasingly distributed across multiple screens such as televisions, tablets, smartphones and personal computers, via multiple content service providers. The continued expansion of network bandwidth, the influx of connected devices and the increased availability of digital content, along with increased accessibility through mobile devices such as tablets and smartphones are accelerating this overall industry shift and leading to changes in consumer behavior. Consumers are demanding higher quality personalized, interactive content experiences, where they can easily discover and access entertainment content.
Home Media Complexity. Video content, such as movies and TV shows, continues to capture the majority of consumers' entertainment spending and viewing time. While many consumers have purchased large high definition televisions (“HDTVs”) to maximize video enjoyment in the home, new devices and services now make video content available to consumers both inside and outside of the home. These new devices and services must help identify what is available across linear broadcast television, DVR, and VOD, as well as OTT services. For consumers, setting up the ideal home media environment is complex and requires integrating numerous devices, subscribing to multiple services (pay TV and internet) and often a deep understanding of media format compatibility. Simplifying the consumer experience in the home media ecosystem is critical to the successful evolution of the industry.
Pay TV Is Moving To The Internet. These new devices, services and capabilities are impacting the full entertainment value chain, fueling new business models and increasing competition among existing market participants while introducing new market participants. Distributors such as pay TV providers, internet video services, retailers and others are seeking ways to strengthen their respective competitive advantages and increase their speed of innovation. Pay TV providers are engaged in a broad effort to enable subscribers to enjoy content where and when they want, on whatever device they choose, which we refer to as "TV Everywhere" ("TVE"). TVE is driving significant investment as service providers move from legacy distribution technologies to internet-based infrastructure for delivering pay TV services.
Content and Business Models. Content producers are also exploring new forms of distribution and business models to protect and advance their position in the distribution value chain. Many content owners are trying direct-to-consumer business models, exploring new forms of content licensing and additional hybrid business models which combine both traditional pay TV with direct-to-consumer distribution. Content distributors are looking to better understand consumer engagement, improve their services and expand their ability to market their content and services. Many distributors are also investing in original entertainment content to establish a more competitive position, retain subscribers and protect their business from future subscriber losses. Combined, these changes are resulting in an overall increase in industry competition between distributors as well as increasing the number of companies distributing premium video content directly to consumers.
Consumer Electronics Devices. Global economic trends and increased competition have challenged much of the traditional consumer electronics (“CE”) marketplace, driving margins lower in the face of increased consumer feature requirements. In addition to traditional TV features, consumers are demanding media and OTT services. This increased functionality requires extensive software development, cloud infrastructure and ongoing maintenance and support for these devices throughout their usable life, leading to higher costs for a CE manufacturer years after the initial sale. These new requirements may not be a core competency for CE manufacturers, adding to the challenge of meeting consumer expectations. Competing devices, such as tablets, smartphones, video game consoles and media streaming devices are also competing for consumer spending as consumers become more comfortable managing multiple consumption endpoints. CE manufacturers are also seeking an ongoing revenue relationship with their customers, one that expands beyond selling the consumer a new device every few years. This leads to a demand for add-on services and advertising that allow the CE manufacturer to monetize and profit from the ongoing distribution or maintenance of entertainment content over the life of a device.
Audiences and Engagement. As traditional media changes, the opportunities for advertisers are evolving as well. Currently advertisers spend more on television commercials than on internet advertising; however, the gap is narrowing as spending on internet advertising increases faster than spending on television commercials. As television viewership has become more fragmented, advertisers are looking for new ways to reach audiences by managing consumer engagement across the many devices and applications consumers use. Additionally, the growth of internet advertising has fundamentally changed the criteria advertisers use to evaluate advertising campaigns, adding metrics such as completion and guaranteed views. Consumption data, audience measurement and other analytics data and services that bridge a consumer's engagement across many devices and entertainment services are emerging as key capabilities required to enable advertising value across both pay TV and internet advertising. Virtually every major U.S. broadcast network has a significant program in place to enable data and audience driven advertising models.
Data Driven Economy. To enable this evolving advertising and media ecosystem, it is critical that advertisers, advertising agencies, broadcast networks and content distributors have broad access to granular census-level viewership data, anonymously matched with other information such as behavioral, demographic and purchase data. While much of the third party data is available as a result of the relative maturity of the digital advertising ecosystem, this level of pay TV viewership data is still relatively scarce. Viewership data is a critical component required to identify, locate and market to specific audiences as well as to enable effective cross-platform measurement and attribution.
Television is rapidly evolving with proliferating content choices including traditional linear programming, VOD, TVE and OTT solutions. Further, consumers are accessing and subscribing to video content in new ways such as "skinny bundles" (which include smaller groups of channels) from incumbent pay TV operators or through OTT services on tablets, smart televisions, and streaming devices. This is leading to pressure on the content and distribution models and we believe we have created a best in class suite of products, advanced technologies and intellectual property that addresses the needs of consumers, television service providers, CE manufacturers and the evolving advertising ecosystem.
Entertainment Discovery, Access and Recording. Finding content to watch or record to watch later remains the foundation of the entertainment experience. We believe new discovery experiences integrating advanced personalization, specific to a person or device which integrates live, recorded and online video, utilizing multiple screens, social engagement and new forms of interaction such as voice commands, will continue to be an area of opportunity. We also believe that metadata, which contains detailed information about programming, data on consumer’s entertainment interests and media engagement history, along with predictive analytics to interpret and utilize the data will be important in enabling highly personalized content discovery experiences.
Audience Monetization and Insights. Shifts in the value chain are creating new ways for consumers to gain access to content and new business models are emerging to capture consumers’ entertainment engagement and resulting spend. Monetizing audiences through content and media experiences across television and OTT services accessed through different devices such as connected TVs, tablets, smartphones, personal computers, media streaming devices and video game consoles, has become a critical challenge for the industry. We are focused on delivering solutions that utilize consumer media engagement data and advanced predictive analytics to help service providers, programmers and advertisers better understand consumer behavior and better target and measure audiences.
Build on Key Customer Relationships. We intend to grow our business by expanding on the technologies that we provide existing customers and creating new customer product and licensing relationships as more companies look to add media entertainment to their digital lifestyle solutions. We continue to accelerate our customers' efforts to address the industry's expanding needs for entertainment discovery, access, recording and audience management. We will continue to expand relationships with customers in various industry and market segments, including:
Introduce New Products, Services and Technologies. We are developing additional technologies and solutions to meet the evolving needs of our extensive customer base. We have committed significant resources to expand our technology base, to enhance our existing products and to introduce additional products. We intend to improve technologies in our current fields of operation, as well as pursue emerging opportunities where we are positioned to drive growth in the business.
Expand and Protect our Intellectual Property Position. We have adopted a proactive patent and trademark strategy designed to protect and extend our technology and intellectual property. We have built, and will continue to add to, a large intellectual property patent portfolio. The licensing of our intellectual property patent portfolio is a significant part of our business. We believe that our future success partly depends on our ability to continue to introduce proprietary solutions for IPGs, DVRs, connected devices, data and analytics. We have patented functionality for many aspects of these solutions in the areas of content discovery, DVR, VOD, TVE, OTT, multi-screen, personalization, contextual search and recommendation and other interactive applications, data analytics and advertising. Our portfolio of internally developed innovation is also enhanced by patents acquired from other industry participants. While we historically have licensed our portfolio for use with linear broadcast television, the industry transition to internet platform technologies is enabling new video services for television inside and outside the home on a broad array of media consumption devices. We believe this transition presents new opportunities for us to expand the industries we serve and to license additional patent rights, which are essential and/or useful as enablers of advanced media devices and services.
Pursue Strategic Transactions. We plan to expand our technology portfolio, improve our capabilities and extend or grow our businesses by pursuing licensing arrangements, joint ventures, and strategic acquisitions of companies whose business, technologies or proprietary rights complement and advance our operational and strategic goals.
Our Product segment includes a suite of component technologies that can be integrated into media service provider internally developed platforms or deployed as an integrated TiVo solution. Our Product segment generated 46%, 46% and 47% of our revenue for the years ended December 31, 2016, 2015 and 2014, respectively.
We currently offer our Platform Solutions products in North America, Europe, Latin America, Asia Pacific and most recently Africa. Globally, our Platform Solutions customers include America Movil S.A.B. DE C.V., Charter Communications, Inc. ("Charter"), Cogeco Inc. ("Cogeco"), Com Hem Holding AB, Cox Communications Inc. ("Cox"), Mediacom LLC, ONO (now part of Vodafone Group plc), Shaw Communications Inc., Virgin Media plc and many others. As of December 31, 2016, 23 million pay TV and consumer households worldwide, including 12 million internationally, are estimated to utilize our TiVo Service Client Software and IPGs. As of December 31, 2016, over 6 million households were using the TiVo service. The number of worldwide pay TV and consumer households utilizing our TiVo Service Client Software and IPGs does not include households using Cubiware's middleware solutions.
TiVo Service Platform. The TiVo Service Platform is a cloud-based service that powers the TiVo Service client software that operates on set-top boxes in consumer homes, as well as applications that operate on third party software platforms, such as iOS and Android, that power the majority of consumer tablets and mobile devices. The solution supports multiple services and applications, such as linear TV programming, broadband video content, digital music, photos and other media experiences. The cloud-based service manages interaction with the TiVo service infrastructure, automatically connecting TiVo-enabled devices to provide program guide data, client software upgrades, advertising and other broadband content. We have enabled the TiVo Service client software to operate on third-party set-top boxes, such as those from ARRIS International plc ("ARRIS") and Technicolor SA/Cisco Systems, Inc., for deployment in multichannel video programming distributor (“MVPD”) networks. We also offer a direct-to-consumer retail TiVo Service in the United States, to consumers who purchase TiVo DVRs and companion TiVo Mini whole-home devices. MVPD’s typically pay engineering fees for deployment and customization plus a monthly per subscriber license fee or a one-time term license fee for our TiVo Service Platform. For our direct-to-consumer retail TiVo Service in the United States, consumers either pay us recurring service fees, or in some cases pay a one-time upfront fee for access to the TiVo service for the life of the purchased TiVo DVR.
IPG Solutions. Our IPGs allow service providers to customize certain elements of the IPGs for their customers and to upgrade the features and services they can offer. Our IPGs provide viewers with current and future program information and are compatible with service providers' subscription management, pay-per-view (“PPV”) and VOD services. We also offer operational support, professional services and content metadata. Our IPGs also have the ability to include advertising, and when advertising is provided in the IPG, we typically share a portion of the advertising revenue with the service provider. We currently offer IPGs marketed to service providers under the i-Guide, Passport and FanTV brands in the U.S., Canada and Latin America. Service providers generally pay us a monthly per subscriber fee to license our IPGs.
G-Guide. In Japan, our joint venture with Dentsu Inc. and Tokyo News Service Limited, Interactive Program Guide Inc. (“IPG JV”), acts as the exclusive provider of program listings and advertising for our IPGs, currently marketed under the G-Guide brand. We have entered into licensing agreements with CE manufacturers and other third parties for televisions, digital recorders, personal computers and smartphones to deliver the television and mobile G-Guide services. We own 46% of the IPG JV, and have certain contractual management rights. We retain the right to license and collect fees for other products, technology and intellectual property in Japan, regardless of whether the customer is an active customer of IPG JV.
CubiTV and TiVo Lite Middleware. We provide flexible middleware solutions targeted towards pay TV operators - cable, satellite, terrestrial and telecommunications operators - in developing and emerging markets who want to introduce advanced TV services to their networks. CubiTV and CubiGo give emerging market pay TV operators the ability to cost-effectively deliver a wide range of interactive services along with a superior user experience to their subscribers. We also plan to provide a more advanced middleware, called TiVo Lite, that offers the TiVo user interface integrated with our Seamless Discovery solution and the Cubiware cloud-based infrastructure. Our middleware runs on basic HD set-top boxes and supports DVR functionality in hard-disk enabled boxes. Our CubiTV and TiVo Lite solutions enable multiscreen technology for
pay TV operators to cost-effectively deliver video-oriented services through CE devices, such as tablets, personal computers and smartphones. CubiTV and TiVo Lite middleware customers typically pay engineering integration fees plus a per device license fee.
Software and Services
Metadata. Our metadata products are a critical component of delivering an interactive entertainment experience. We offer comprehensive metadata covering television, sports, movies, music, celebrities, books and video games. Our database includes unique data on more than 10 million programs, including theatrical, DVD and Blu-ray releases, as well as thousands of celebrities. Our database also has information on 3.7 million music albums, 32.8 million songs, 11.4 million books, 117,000 video games, 50,000 active athletes and 55,000 sporting events. We continue to enhance our metadata editorially and by utilizing advanced machine learning algorithms using our Knowledge Graph technology, which dynamically maps millions of entertainment relationships across internet, social networks and streaming media sources. The metadata services are broken into levels: basic metadata (such as artist or album), navigational metadata (such as relationships between actors and movies or television series) and editorial metadata (such as actor biographies, television, movie or music reviews) and enhanced metadata (such as weighted keywords and connections across all entities in our databases). We have continued to expand our metadata to include information from social networks, catalogs of digital providers and other sources. We deliver metadata using real-time APIs and as bulk data files depending on our customer’s requirements. Our focus on quality, robustness and consistent international depth has made us a recognized leader in entertainment metadata services worldwide.
Our television and movie metadata covers over 75 countries including the United States, countries in Latin America including Brazil, countries in Europe including Russia, Turkey and Poland, and countries in Asia including Hong Kong, Taiwan and India. We license several metadata and service offerings, including, but not limited to, schedules, listings and web content linking services. Customers typically pay us a monthly or quarterly fee for the rights to use the metadata, receive regular updates and integrate it into their own service. Our metadata can be sold stand-alone or as a complement to another TiVo product such as an IPG or search and recommendation solution. Globally our metadata customers include leading companies such as Google Inc. (now part of Alphabet Inc.), Microsoft Corporation ("Microsoft"), Panasonic Avionics Corporation and Samsung.
Seamless Discovery and Natural Language Voice. Advanced Search, Recommendation and Conversation services provide service providers, device manufacturers and application/service developers a way to enable their customers to quickly find, discover, and access content across linear broadcast television, VOD, DVR and OTT sources. We process anonymous
viewing information uploaded from set-top boxes, digital media devices and consumer input for use in recommendations and personalization. The advanced algorithms of our technology understand the nature and relationship of content information and the context surrounding a user's behavior to deliver an advanced personalized content discovery experience. Results can be generated through traditional text entry, voice interaction or our content recommendations. Our natural language voice solution, when combined with our advanced search and recommendations technology, enables a conversational interaction between a viewer and their content experience. We have brought together advanced semantic and contextual technologies to enable powerful media centric voice interactivity. Combined with expertise of hundreds of content editors and our comprehensive entertainment metadata, we deliver a powerful discovery solution. Customers typically pay us a per subscriber or per device fee. Our search and recommendation solutions are widely deployed with many Tier 1 pay TV operators including CSC Holdings, LLC ("Cablevision", now part of Altice N.V. ("Altice")), AT&T Inc. ("AT&T"), Charter and DISH Network L.L.C. ("DISH"), and non-operators including Fox Network, Sony Corporation ("Sony") and The CW.
Data and Analytics. We provide data and analytics solutions to advertisers, advertising agencies and television networks. Our suite of cross-media research, measurement and analytics solutions help our customers improve advertising targeting, accountability and return on media investment by utilizing nationally representative single-source set of viewership data, anonymously linked to purchases made at the household level. Our customers include advertisers, advertising agencies, broadcast and cable networks, and others in the programmatic and targeted advertising marketplace.
Audience Management and Optimization. Our audience management and optimization solutions include Ad Optimizer and Promotion Optimizer, browser based software-as-a-service applications, which use big data with predictive analytics to provide TV audience insights and advertising campaign management. Ad Optimizer analyzes past viewing behaviors to find and target future viewing audiences, increasing the value and performance of advertising inventory across linear, VOD and TVE. TV networks and pay TV providers can increase advertising revenue, increase the effectiveness of their advertising inventory, and deliver results to help meet advertising campaign goals. Advertising agencies can also use Ad Optimizer to plan effective advertising buys and maximize their clients campaign effectiveness to reach their target audience. The product combines advanced advertising campaign management and media planning functionality into one platform and features the ability to manage campaigns based on factors such as delivery goals, budget, viewing history and audience demographics.
Promotion Optimizer is based on the same platform and predictive analytics capabilities as Ad Optimizer and enables television networks to create on-air promotion plans, targeted to specific audience segments. By having the capability to use past viewing data from multiple sources, Promotion Optimizer enables television networks to create plans for on-air promotions that are targeted to data driven audience segments.
Audience Insights. Our Operator Insights and Seamless Insights applications are tools to analyze the habits and preferences of end users, so service providers can advance operational efficiency, improve customer engagement, support carriage and bundling decisions, help mitigate churn and maximize financial performance. Using a data warehouse designed to handle TV viewership data, reference data and clickstream events, the analytics engine is able to process raw data from millions of set-top boxes, panels and third-party sources, as well as program, billing and customer relationship data to further support business goals. Our Operator Insights software-as-a-service application enables service providers to unlock the value of their return-path data, transforming raw data into meaningful and useful viewership and usage insights that can be used to inform marketing, programming and operational initiatives. Utilizing our Search and Recommendation platform, we also offer Seamless Insights, an analytics solution which provides MVPDs analysis of their subscriber’s minute-by-minute engagement and consumption of content.
TiVo IPG Advertising Service. We provide advertisers with nationwide or regionally targeted advertising on our IPGs. Advertisers place ads in a variety of display formats, seamlessly incorporated into the IPG user interface. Advertisements can trigger a variety of actions when selected via a remote control, including video advertisement playback, DVR recordings and direct response. We believe media and conventional advertisers are increasingly interested in the value proposition of utilizing display advertising in television interfaces to reach consumers with an interactive experience or guide them to related media content. In addition, we work with service providers bundling their non-TiVo IPG advertising inventory with our native inventory giving us a much more significant national footprint.
Analog Content Protection ("ACP"). Our legacy technology of analog video content security, commercially known as ACP, has been used to protect billions of videocassettes since 1985 and billions of DVDs since 1997. We license ACP directly to CE manufacturers and content production studios, as well as semiconductor companies that supply the CE manufacturers. Our ACP technologies allow consumers to view programming stored on prerecorded videocassettes and DVDs
or transmitted as digital PPV or VOD programs via cable or satellite, but deter unauthorized consumer copying of such programming with recording devices. The Motion Picture Association of America and independent studios can use our video content security technology to protect movie releases on videocassette or DVD. ACP can be licensed as a fixed annual fee, per unit royalty or, in some cases, as a one-time fee for a perpetual license. Our ACP customers include ARRIS, Fujitsu Limited, Mitsubishi Electronic Corporation, Panasonic, Paramount Home Entertainment, Inc., Pioneer Corporation, Samsung, Sharp, Sony, Toshiba Corporation and others.
Intellectual Property Licensing Segment
Our Intellectual Property Licensing segment generated 54%, 54% and 53% of our revenue for the years ended December 31, 2016, 2015 and 2014, respectively.
Patent Portfolios. The foundation for our Intellectual Property Licensing segment is two expansive portfolios from Rovi and TiVo Solutions, which encompass approximately 6,000 issued and pending patents, including approximately 4,000 internationally. We have filed patent applications relating to thousands of inventions resulting from our research and development, including many critical aspects of the design, functionality and operation of TiVo products and services as well as technology that we may incorporate into future products and services. We continue to grow our patent portfolios in size and relevance through ongoing investment, targeted acquisitions and strategic management of the portfolios. We generate a substantial portion of our Intellectual Property Licensing revenue from our discovery patents, which represents 86% of our total patents. Over the last 10 years, our portfolio of U.S. discovery patents has more than doubled in total size; however, the number of issued patents in our patent portfolio has more than tripled. The scope and relevance of our discovery patent portfolios have also grown over this period, reflective of the increase in IPG, DVR and mobile device media functionality. We believe that interactive video guidance technology is a necessary tool for television viewers facing an increasing amount of available content and an increasing number of digital television channels, VOD services, and OTT services. The IPG is evolving from a solution for linear television content to a guide for all the content consumers have access to across all of the devices they use. Our discovery patent portfolio includes important intellectual property coverage and protection for key features and functionality across guidance, search and recommendation, DVR, VOD, OTT, second screen offerings, mobile device media utilization and various interactive television applications. Our discovery portfolio's patents have expiration dates that range from 2017 to 2036. We have extensive, ongoing innovation efforts in place to ensure the longevity of our patent portfolios so they continue to provide long-term protection across the key areas of our business and the media experience.
Protecting our Investment. From time-to-time, we engage in intellectual property litigation to protect our technology from infringement. We are currently involved in litigation against Comcast Corporation ("Comcast"), where we have alleged that Comcast is infringing our intellectual property. While litigation is never our preference and we prefer to reach a mutually agreeable commercial licensing arrangement, it is a necessary tool to effectively protect our technology investment.
Multiple Licensing Segments. Traditional pay TV service providers typically pay us a monthly per subscriber fee and have historically licensed our discovery patent portfolio for the television use case. As mobile TV initiatives have become more prevalent with service providers, we have established secondary licensing agreements to provide coverage and rights for the mobile TV use case. Online and OTT video service providers typically pay us a flat fee to license our patents for a specified period of time. Our CE licensees typically pay us license fees based on the number of units produced or shipped that utilize our patents, for specified products, in defined territories. Our agreements with the major CE manufacturers generally allow them to ship an unlimited number of units utilizing our discovery patents, provided they pay us a fixed annual fee.
Major Licensees. Our major pay TV operator and video distribution intellectual property licensees include Altice (including Cablevision), AT&T, Canal+, Charter, Cox, DISH, Foxtel, Hulu, Netflix, Inc., Sky Italia, Sky plc, VUDU, Inc. and others. We also have license agreements with third party IPG providers such as ARRIS and others. Our CE intellectual property licensees include companies such as LG Electronics, Inc., Panasonic, Samsung and Sony. As of December 31, 2016, 136 million pay TV subscribers worldwide are estimated to be receiving a licensed IPG, including 77 million internationally.
Innovation and Development
Research and Development. Our internal research and development efforts are focused on developing new innovative products, enhancing our existing products and extending these technologies into new or evolving applications. We have acquired other companies and technologies to supplement our research and development expenditures in the past, and may continue to do so in the future. Our Research and development expenses were $125.2 million, $99.9 million and $106.6 million for the years ended December 31, 2016, 2015 and 2014, respectively.
TiVo Service Platform & Client Software. Over the past two years, the TiVo Service Platform and Client Software have undergone a significant refactoring. In addition to developing a new look and feel, our next generation TiVo Service Platform integrates all of our most advanced technologies and solutions, including advanced cross-platform conversational voice search, personalized recommendations, predictions and insights, extensive video metadata, robust data collection and new back office capabilities. The new TiVo Service Platform is expected to begin rolling out to our pay TV and retail customers in 2017.
TiVo-Enabled Hardware Design. We continue to advance the TiVo-enabled hardware designs, including our latest TiVo BOLT DVRs and TiVo Mini non-DVR set-top boxes, and specifications developed by TiVo for set-top boxes and other devices. We provide this design to our contract manufacturer that produces TiVo-branded hardware. The TiVo-enabled hardware design includes a modular front-end that allows the basic platform to be used for digital and analog broadcast, cable, OTT and VOD. In addition, the TiVo-enabled hardware design allows the cloud-based TiVo Service Platform and the internet to connect with third party consumer devices and services to enable existing and future functionality.
Personalization, Prediction and Voice. The ongoing investment in our Seamless Discovery platform enables us to provide some of the most advanced capabilities in media personalization, prediction and voice search. Built on a robust cloud architecture and widely deployed with Tier 1 pay TV and other providers, our solution is a leading technology in the market.
Data & Analytics. We are leading the industry to use advanced data analytics technologies focused on television data, consumer data and cutting edge predictive analytics to create efficiencies and value multipliers in the evolving television advertising ecosystem. This technology stack includes a predictive analytics engine, audience management platform and a data warehouse, which collectively processes the raw TV viewership data events from millions of set-top boxes anonymously matched against billing, customer and a range of other third party data.
Operations and Technical Support. We have technical support and certification operations to support our products:
TiVo Service. We provide customer support through outsourced service providers as well as our internal customer service personnel for our direct-to-consumer retail TiVo Service in the United States. When our product is distributed through a pay TV service provider (such as Altice, Cogeco, General Communication, Inc., Grande Communications Networks LLC, ONO (now part of Vodafone Group plc), RCN Telecom Services, LLC and Virgin Media), the pay TV service provider is primarily responsible for customer support. We offer training, network operating center services and other assistance to these pay TV service providers. Our retail TiVo Service subscribers have access to an internet-based repository for technical information and troubleshooting techniques. They also can obtain support through other means such as the TiVo website, web forums, email and telephone support.
Consumer Warranty and Support. We offer a standard manufacturer's warranty period to consumers for TiVo-enabled DVRs of 90 days for parts and labor from the date of purchase and from 91-365 days for parts only. We offer a Continual Care warranty to TiVo-Owned customers which extends the one-year warranty for parts only for customers with current monthly service plans who also use our latest BOLT and Roamio DVRs for as long as such customers remain active. We contract with third parties to perform warranty repairs. Warranties provided to pay TV service providers who distribute TiVo hardware vary in length depending on the agreement.
Manufacturing and Supply Chain. We outsource the manufacturing of our products to third-party manufacturers. This outsourcing extends from prototyping to volume manufacturing and includes activities such as material procurement, final assembly, test, quality control and shipment to distribution centers. The majority of our products are assembled in Mexico, with the majority of our components delivered from manufacturers overseas. Our primary distribution center is operated on an outsourced basis in Texas.
The components that make up our products are purchased from various vendors, including key suppliers such as Broadcom Corporation, which supplies system controllers. Some of our components, including system controllers, chassis, remote controls, and certain discrete components are currently supplied by sole source suppliers. Our dependence on these sole source suppliers could expose us to the risk of supply shortages and unexpected price increases.
We often require substantial lead time to purchase components and manufacture anticipated quantities of devices that enable the TiVo service. This long lead time requires us to make component purchasing and inventory decisions in advance of our peak selling periods. We offer a 30-day money back guarantee to individual retail end-users who purchase from TiVo.com. We typically do not offer a right of return or significant extended payment terms to our retailer customers.
Seasonality. Sales of our TiVo devices and subscriptions to the TiVo service sold directly to retail consumers are affected by seasonality. We generate a significant number of our annual device sales and new retail consumer subscriptions during and immediately after the Christmas holiday shopping season. We also incur significant increases in expenses in the second half of the year related to hardware costs, marketing development funds and other payments to channel partners, and sales and marketing costs in advance of the Christmas holiday shopping season.
There are a number of companies that produce and market advanced media solutions such as DVRs, IPGs, search, recommendation, natural language voice, metadata, and advanced data and analytics in the various formats which compete, or we believe will compete, with our products and services over time. Principal competitive factors include brand recognition and awareness, product and service functionality, innovation, ease of use, personalization, content access and availability, mobility and pricing. While we are competitive across this range of factors, we believe our primary competitive differentiation comes from our ability to integrate of all of our products to create unique value to our customers.
Pay TV and Consumer Electronics Solutions: Our pay TV solutions face competition from companies such as Cisco (including NDS), Ericsson (including Mediaroom), Kudelski, SA and from multiple system operator internally developed solutions such as Comcast X1 and Liberty Global's Horizon Media, which have created competing products that provide user interface software for use on television set-top boxes and consumer electronic and mobile devices. Such companies may offer more economically attractive agreements to service providers and CE manufacturers by bundling multiple products together. Another common competitor we encounter is a customer who chooses to build its own IPG and DVR solution, under license with our intellectual property. We believe that we provide a strong alternative to “do-it-yourself,” as we have innovative, high-quality products ready to be implemented, with local and network DVR, integrated data distribution infrastructure and content, as well as third party services (such as VOD services). We differentiate our products by continuing to integrate our broad portfolio of products into a suite of solutions and services for our customers. We believe our solutions can speed our customers' time to market, be deployed at a lower cost than internally built products, and can be superior to “do-it-yourself” products. For those that choose to do it themselves, we have component products such as advanced search, recommendation, conversation and insights, Cubiware middleware products and our extensive metadata offerings providing them a full suite of services to power their next generation in-house built media experience.
Consumer Retail DVRs. Our retail products compete in the U.S. against solutions sold directly by television service providers. These solutions often have similar feature sets, such as DVR capabilities, search and discovery, multi-room viewing, and TVE access for mobile devices. Some of these solutions are offered at lower prices, but in many cases, are bundled with other services provided by the operator and the price for the DVR and DVR service may not be apparent to the consumer. In addition, the DVRs are usually professionally installed and may appeal to consumers who do not wish to pro-actively select a DVR service. Our retail products also compete against products with on-demand OTT streaming capabilities offered by CE manufacturers. Though these devices do not offer the breadth of the TiVo service, they do offer alternative ways to access TVE and OTT content. For example, many CE manufacturers have television or DVD products that are internet enabled and others have built dedicated devices for accessing video over the internet such as Apple TV, Amazon Fire TV, Google Chromecast and Roku. Similarly, companies such as DISH (Sling TV), Microsoft and Sony have now enabled the digital delivery of video programming over the internet to video game consoles and other consumer devices.
Metadata. In metadata, we compete with other providers of entertainment-related content metadata such as Gracenote (a subsidiary of Tribune Media Company) and Ericsson Broadcast and Media Services (formerly Red Bee Media and FYI Television, Inc.). While we do not believe that our competitors' metadata sets offer the same comprehensive breadth of focus on media exploration, discovery and management in as many regions of the world as we do, they present competition to our metadata business for each of their areas of focus.
Data Analytics. We collect and analyze audience research data in an area where companies such as comScore, Inc. (including Rentrak) and Nielsen and other online data analytics companies compete for research spend from advertisers, advertising agencies and television networks. Other large companies are also focusing resources in this area including Comcast, Facebook, Inc. and Google. Many of our existing customers are investing in significant platforms to enable their businesses with these capabilities. We believe that there is a significant opportunity for us as an independent data and technology provider, with proprietary access to critical data assets associated with consumers' engagement with entertainment media.
Content Security Technology. Our analog video content security solutions are proprietary and have broad U.S. and international patent coverage. We have an analog content security solution that has been widely deployed on commercial products that significantly distorts or inhibits copying by personal video recorders, including DVD recorders and hard drive recorders with an analog out. With the increase in content distribution over the internet, and with the continuing advance of digital content and high-definition formats, our analog video content security solutions are viewed by some of our customers as being less important than the other digital and network content protection solutions. Our content security technology therefore faces risk of content providers choosing not to copy protect their content or CE manufacturers producing personal video recorders without analog output.
Intellectual Property Rights, including Patents, Copyrights, Trademarks and Tradenames
We operate in an industry in which innovation, investment in new ideas and protection of our IP rights are critical for success. We protect our innovations and inventions through a variety of means, including but not limited to applying for patent protection domestically and internationally.
As of December 31, 2016, we held approximately 1,400 U.S. patents and had approximately 700 U.S. patent applications pending. As of December 31, 2016, we also had approximately 3,000 foreign patents and approximately 800 foreign patent applications pending. Each of our issued patents will expire at a different time based on the particular filing date of that respective patent, with expiration dates as late as 2036.
We own or have rights to various copyrights, trademarks and trade names used in our business. These include, but are not limited to, TiVo, Rovi, FanTV, TV Guide, Passport, Rovi Guides, G-GUIDE, iGuide and Gemstar. We have secured numerous foreign and domestic trademark registrations for our distinctive marks, including but not limited to registrations, for the marks “TiVo,” the TiVo logo, “Season Pass,” Thumbs logos and certain sound marks.
Many of our competitors and other companies and individuals have obtained, and may be expected to obtain in the future, patents that may directly or indirectly affect the products or services offered or under development by us. We are currently developing a variety of enhancements to our DVRs, IPGs and other products and services. We offer no assurance that any enhancements developed by us would not be found to infringe patents that are currently held or may be issued to others. There can be no assurance that we are or will be aware of all patents that may pose a risk of infringement by our products and services. In addition, patent applications are generally confidential for a period of 18 months from the filing date, or until a patent is issued in some cases, so we cannot evaluate the extent to which certain products and services may be covered or asserted to be covered by claims contained in pending patent applications prior to their publication. In general, if one or more of our products or services were to infringe patents held by others, we may be required to stop developing or marketing the products or services, to obtain licenses to develop and market the products or services from the patent holders or to redesign the products or services in such a way as to avoid infringing the patent. This could affect our ability to compete in a particular market.
Legislative and Regulatory Actions
A number of government and legislative initiatives have been enacted to encourage development and implementation of technologies that protect the rights and intellectual property of the content owners. For example, the U.S. and other countries have adopted certain laws, including the Digital Millennium Copyright Act of 1998 ("DMCA"), and the European Copyright Directive, which are aimed at the prevention of piracy of content and the manufacture and sale of products that circumvent copy protection technologies, such as those covered by our patents.
Compatibility Between Cable Systems and Consumer Electronic Equipment
The Federal Communications Commission ("FCC") has been working for over a decade to implement a congressional mandate to create a competitive market for cable television set-top boxes and other devices to access video programming on cable systems (“navigation devices”) and give consumers a choice in the devices used to access such programming, while still allowing the cable systems to have control over the secured access to their systems.
To meet its statutory obligation without compromising the security of video services, the FCC required cable systems to make available a security element (now known as a CableCARD) separate from the basic navigation device needed to access video program channels. In 2003, the FCC adopted regulations implementing an agreement between cable television system operators and CE manufacturers to facilitate the retail availability of so-called “plug and play” devices that utilize unidirectional CableCARDs, including digital televisions and other digital devices that enable subscribers to access cable television programming without the need for a set-top box (but without the ability for consumers to use interactive content). In 2013, the United States Court of Appeals for the District of Columbia Circuit struck down the FCC rules in a way that could have an impact on cable operators’ continued provision of CableCARDs to customers for use with third-party navigation devices. In December 2014, Congress passed the Satellite Television Extension and Localism Act Reauthorization ("STELAR"), which repealed an FCC requirement that cable operators employ separable security (i.e., CableCARDs) in the set-top boxes they lease to their subscribers effective December 4, 2015. STELAR also directed the FCC to create a working group to find a successor standard to replace the CableCARD. The cable industry has continued to provide, and committed to Congress to provide, CableCARDs for third-party devices like those supplied by TiVo to requesting customers. In February 2016, the FCC adopted a notice proposing rules intended to permit third-party manufacturers of customer premises equipment, like us, to have access to programming and program guides while maintaining security and protecting the intellectual property rights of programmers. The FCC did not act on these proposals, and, with the change in Presidential administrations, has removed those proposals from consideration. We cannot predict the ultimate impact of any new technical equipment regulations on our business and operations. Although current FCC regulations no longer prohibit multi-channel video service providers from deploying navigation devices with combined security and non-security functions, further developments with respect to these issues could impact the availability and/or demand for “plug and play” devices, particularly bi-directional devices, and set-top boxes, all of which could affect demand for IPGs incorporated in set-top boxes or CE devices.
General Government Regulation
We are subject to a number of foreign and domestic laws and regulations that affect companies that import or export software and technology, including encryption technology, such as the U.S. export control regulations as administered by the U.S. Department of Commerce.
We are also subject to a number of foreign and domestic laws that affect companies conducting business on the internet. In addition, because of the increasing popularity of the internet and the growth of online services, laws relating to user privacy, freedom of expression, content, advertising, accessibility, network neutrality, information security and IP rights are being debated and considered for adoption by many countries throughout the world. Each jurisdiction may enact different standards, which could impact our ability to deliver data, services or other solutions through the internet.
We may be further subject to international laws associated with data protection, privacy and other aspects of our business in Europe and elsewhere, and the interpretation and application of data protection laws remains uncertain. In addition, because our services are accessible worldwide, foreign jurisdictions may claim that we are required to comply with their laws. Further, the application of existing laws regulating or requiring licenses for certain businesses of our advertisers can be unclear. The resulting regulation, if any, may alter our ability to target advertising or provide data about the end-users and/or customers and their behavior.
In the U.S., service providers have been subject to claims of defamation, libel, invasion of privacy and other data protection claims, torts, unlawful activity, copyright or trademark infringement, or other theories based on the nature and content of the materials searched and the ads posted or the content generated by users. In addition, several other federal laws could have an impact on our business. For example, the Digital Millennium Copyright Act ("DMCA") has provisions that limit, but do not eliminate, our liability for hosting or linking to third-party websites that include materials that infringe copyrights or other rights, so long as we comply with the statutory requirements of this act. The Children's Online Privacy Protection Act restricts the ability of service providers to collect information from minors, and the Protection of Children from Sexual Predators Act of 1998 requires service providers to report evidence of violations of federal child pornography laws under certain circumstances.
As of December 31, 2016, we had approximately 1,700 full-time employees, of which approximately 480 were based outside the U.S. None of our employees are covered by a collective bargaining agreement or are represented by a labor union. We have not experienced any organized work stoppages. We believe that our future success will depend in part on the continued service of our key employees and on our continued ability to hire and retain qualified personnel. We may not be able
to retain our key employees and may not be successful in attracting and retaining sufficient numbers of qualified personnel to conduct our business in the future.
Information About Our Executive Officers
The names of our executive officers, their ages and positions as of December 31, 2016 are shown below. Biographical summaries of each of our executive officers are included below.
Thomas Carson. Mr. Carson has served as our President and Chief Executive Officer since December 2011. Mr. Carson previously was Executive Vice President, Worldwide Sales & Services since May 2008 when the Company (then Macrovision Corporation ("Macrovision"), the predecessor of Rovi Corporation) acquired Gemstar-TV Guide International ("Gemstar"). From April 2006 to May 2008, Mr. Carson served in various capacities at Gemstar, including President of the North American IPG business and President for North American CE business. Prior to joining Gemstar, Mr. Carson held various executive positions at Thomson Multimedia Corporation, including Executive Vice President of Operational Efficiency Programs, Executive Vice President, Global Sales and Services and Executive Vice President of Patents & Licensing. Mr. Carson holds a B.S in Business Administration and an M.B.A. from Villanova University.
Dustin Finer. Mr. Finer has served as our Chief Administrative and Internal Operations Officer since June 2016. Mr. Finer joined the Company (then Rovi) in May 2012 as Executive Vice President of Human Resources. Prior to Rovi, he served in various leadership roles at MySpace, a social networking company, including Chief of Operations and Executive Vice President from July 2010 to September 2011, and Chief People Officer from July 2009 to July 2010. Previously, Mr. Finer served as Senior Vice President of Human Resources at Fox Interactive Media from August 2008 to June 2009, and as Senior Vice President of Human Resources at Gemstar from May 2006 to May 2008. He also held a number of senior roles at Ascent Media Group from November 2000 to April 2006, including Senior Vice President of Global Human Resources, Associate General Counsel and Chief Litigation Counsel. Mr. Finer holds a B.A. in Political Science from the University of California, San Diego and a J.D. from the University of the Pacific.
Peter Halt. Mr. Halt has served as our Chief Financial Officer since May 2012. Mr. Halt joined the Company (then Rovi) in May 2008 in connection with the acquisition of Gemstar, and served as the Company’s Senior Vice President and Chief Accounting Officer from 2008 to 2012. Mr. Halt previously served as Senior Vice President, Finance and Chief Accounting Officer at Gemstar from March 2004 to May 2008. Prior to joining Gemstar, Mr. Halt served in various capacities at Sony Pictures Entertainment, including serving as Chief Financial Officer of Sony Pictures Digital Entertainment from November 2000 to November 2003, and as Corporate Controller of Sony Pictures Entertainment from July 1997 to November 2000. Mr. Halt holds a B.S. in Business from the University of Southern California.
Pamela Sergeeff. Ms. Sergeeff has served as our Executive Vice President, General Counsel since December 2013. Ms. Sergeeff joined the Company (then Macrovision) in 2003. She has held various positions in the legal group from 2003 to 2013, including serving as Senior Vice President and Associate General Counsel from March 2011 to December 2013 and as Vice President and Associate General Counsel from July 2007 to March 2011. Ms. Sergeeff also serves as the Company’s Chief Compliance Officer and Corporate Secretary. Ms. Sergeeff holds a B.A. in Economics from the University of California, Los Angeles and a J.D. from the University of California, Berkeley. Ms. Sergeeff is a member of the California State bar.
Pete Thompson. Mr. Thompson has served as our Chief Operating Officer since September 2016. Prior to joining the Company, Mr. Thompson served as Vice President, Strategic Partnerships at Sonos Inc., a consumer electronics company, from October 2015 to September 2016. From September 2013 (when Ericsson Corporation acquired Microsoft’s Mediaroom division) to September 2015, Mr. Thompson served as Senior Vice President of the TV Middleware Business group at Ericsson, a networking and telecommunications equipment and services company. Prior to that, he served in various capacities at Microsoft from January 2006 through September 2013. Mr. Thompson holds a B.A. in International Economics from the University of California, Los Angeles and an M.B.A. from Northwestern University.
Our website is located at http://www.tivo.com. We make available free of charge on our website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after we electronically file such material with, or otherwise furnish it to, the Securities and Exchange Commission (the “SEC”). Copies will be provided to any stockholder on request to TiVo Corporation, Attention: Corporate Secretary, 2 Circle Star Way, San Carlos, California 94070. The reference to our website does not constitute incorporation by reference of the information contained on or hyperlinked from our website and should not be considered part of this document.
The public may also read and copy any materials we file with the SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Rooms by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. The SEC's website is located at http://www.sec.gov.
ITEM 1A. RISK FACTORS
Investing in our common stock involves a high degree of risk. You should carefully consider the risk factors set forth below. You should consider these risk factors together with other information contained or incorporated by reference in our filings with the Securities and Exchange Commission before investing in our securities. If any of the following risks are realized, our business, operating results, financial condition, and prospects could be materially and adversely affected, which in turn could adversely affect our ability to repay our outstanding convertible senior notes or other indebtedness. In those events, the price of our common stock could decline, and you could lose part or all of your investment. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business.
Risks Related to the Merger of Rovi Corporation and TiVo Solutions
We have incurred and expect to continue to incur significant restructuring and integration-related costs following the merger of Rovi Corporation with TiVo Solutions and may not realize our anticipated synergies and cost savings with respect to our integration and restructuring initiatives.
Following completion of the TiVo Acquisition, we initiated our plan to integrate TiVo Solutions' and Rovi’s businesses. We expect to incur material transaction, restructuring, transition and integration-related costs in connection with integrating TiVo Solutions' operations with the operations of Rovi. This integration may not be achieved in a timely and efficient manner, and we may not fully realize the anticipated cost savings and synergies for a variety of reasons. Some of the risks related to this integration include failure to obtain expected cost savings due to cost overruns, failure to consolidate our disparate administrative and engineering operations and employment and other law, rules, regulations or other limitations that could have an impact on timing, amounts or costs of achieving expected synergies. In addition, these restructuring, integration and cost reduction plans are designed to reduce our fixed costs and our operating expenses, which include the future consolidation of existing office locations, elimination of redundant information systems, product integration and consolidation efforts, and employee-related costs. These restructuring and integration activities are likely to result in significant restructuring charges that will adversely affect, our results of operations for the periods in which such charges occur. Additionally, actual costs related to such restructuring plans have in the past, and may in the future, exceed the amounts that we previously estimated, leading to additional charges as actual costs are incurred. And further, if the expected cost savings and synergy benefits are not realized, our business will be harmed.
TiVo Corporation will be required to make a cash payment to stockholders who validly exercise appraisal rights in connection with the merger between Rovi Corporation and TiVo Solutions and the amount of such payment has not been determined.
Under Delaware law, holders of common stock of TiVo Solutions who did not vote to approve the TiVo Acquisition and who properly assert and exercise their appraisal rights with respect to their shares (“Dissenting Holders”) are entitled to receive a cash payment in an amount equal to the fair value of their shares (as determined in accordance with the provisions of Delaware law) in lieu of the shares of TiVo Corporation which they would otherwise have been entitled to receive if they commence an appraisal action in the Delaware Court of Chancery and proceed to a verdict. As of December 31, 2016, Dissenting Holders, who owned in the aggregate approximately 9.1 million shares of TiVo Solutions as of September 7, 2016 (the “TiVo Acquisition Date”), filed a petition for appraisal in the Delaware Court of Chancery exercising their appraisal rights. The merger consideration for those shares is currently held in an account by the exchange agent in the TiVo Acquisition. Should this matter be adjudicated in the Court of Chancery, regardless of the verdict, the Dissenting Holders would be entitled to receive a cash payment in an amount equal to the fair value of their TiVo Solutions common stock (as determined in accordance with the provisions of Delaware law) in lieu of the shares of TiVo Corporation which they would otherwise have been entitled to receive pursuant to the Merger Agreement. The Dissenting Holders would also receive prejudgment interest on any appraisal award, which would be calculated at a rate of 5% above the Federal Reserve Discount Rate, with interest compounded quarterly. The amount of cash required to be paid to the Dissenting Holders is uncertain and may be greater than the amount currently in an account with the exchange agent in the TiVo Acquisition. Any significant increase in the obligation to the Dissenting Holders could have a material adverse effect on TiVo Corporation’s cash position and financial condition.
Risks Related to Our Financial Position and Capital Needs
Our ability to use our net operating loss carryforwards ("NOLs") may be limited; stock transfer restrictions in our certificate of incorporation may act as an anti-takeover device.
As of December 31, 2016, we had U.S. federal NOLs of $1.2 billion, which expire in various years between 2019 and 2035, if not limited by triggering events prior to such time. Under the provisions of the Internal Revenue Code, changes in our ownership, in certain circumstances, will limit the amount of U.S. federal NOLs that can be utilized annually in the future to offset taxable income. In particular, Section 382 of the Internal Revenue Code imposes limitations on a company’s ability to use NOLs upon certain changes in such ownership. Calculations pursuant to Section 382 of the Internal Revenue Code can be very complicated and no assurance can be given that upon further analysis, our ability to take advantage of our NOLs may be limited to a greater extent than we currently anticipate. If we are limited in our ability to use our NOLs in future years in which we have taxable income, we will pay more taxes than if we were able to utilize our NOLs fully. We may experience ownership changes in the future as a result of subsequent shifts in our stock ownership that we cannot predict or control that could result in further limitations being placed on our ability to utilize our federal NOLs.
On September 7, 2016, upon the effective time of the merger with TiVo Solutions, our certificate of incorporation was amended and restated to include certain transfer restrictions intended to preserve our tax benefits pursuant to Section 382 of the Internal Revenue Code that apply to transfers made by 5% stockholders, transferees related to a 5% stockholder, transferees acting in coordination with a 5% stockholder, or transfers that would result in a stockholder becoming a 5% stockholder. Such transfer restrictions will expire on the earlier of (i) the repeal of Section 382 or any successor statute if our board of directors determines that such restrictions are no longer necessary or desirable for the preservation of certain tax benefits, (ii) the beginning of a taxable year to which the Board determines that no tax benefits may be carried forward or (iii) such other date as our Board shall fix in accordance with the certificate of incorporation.
The transfer restrictions described above could make it more difficult for a third party to acquire, or could discourage a third party from acquiring, a large block of our common stock. This may adversely affect the marketability of our common stock by discouraging existing or potential investors from acquiring our stock or additional shares of our stock. It is also possible that the transfer restrictions could delay or frustrate the removal of incumbent directors and could make more difficult a merger, tender offer or proxy contest involving us, or impede an attempt to acquire a significant or controlling interest in us, even if such events might be beneficial to us and our stockholders.
We have indebtedness which could adversely affect our financial position.
As of December 31, 2016, we had total debt with a par value of $1.0 billion, which included $682.5 million under our Term Loan Facility B and $345.0 million under our 2020 Convertible Notes. Our Term Loan Facility B is guaranteed by us and certain of our domestic and foreign subsidiaries and is secured by substantially all of our, the subsidiary guarantors and the co-borrowers’ assets. Our indebtedness may:
Our ability to meet our debt service obligations will depend on our future performance, which will be subject to financial, business, and other factors affecting its operations, many of which are beyond our control.
Covenants in our debt agreements restrict our business in many ways and if we do not effectively manage our covenants, our financial condition and results of operations could be adversely affected.
Our Term Loan Facility B contains various covenants that limit our ability and/or our restricted subsidiaries’ ability to, among other things:
A breach of any of these covenants could result in a default under our Term Loan Facility B and/or our other indebtedness, which could in turn result a substantial portion of our indebtedness becoming due prior to its scheduled maturity date. In such event, we may be unable to repay all of the amounts that would become due under our indebtedness. If we were unable to repay those amounts, the lenders under our Term Loan Facility B could proceed against the collateral granted to them to secure that indebtedness. In any case, if a significant portion of our debt was accelerated, we might be forced to seek bankruptcy protection.
We may not be able to generate sufficient cash to service our debt obligations.
Our ability to make payments on and to refinance our indebtedness will depend on our financial and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We may be unable to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal and interest on our indebtedness.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital or restructure or refinance our indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. In the absence of such operating results and resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. Our Term Loan Facility B restricts our ability to dispose of assets, use the proceeds from any disposition of assets and refinance our indebtedness. We may not be able to consummate those dispositions or to maximize the proceeds that we could realize from them and these proceeds may not be adequate to meet any debt service obligations then due.
In addition, borrowings under our Term Loan Facility B are, and are expected to continue to be, at variable rates of interest and expose us to interest rate risk. If interest rates increase, our debt service obligations on the variable rate indebtedness would increase even though the amount borrowed remained the same, and our net income would decrease.
Repayment of debt is dependent on cash flow generated by our subsidiaries and their respective subsidiaries.
Our subsidiaries, including Rovi Guides Inc., Rovi Solutions Corporation and TiVo Solutions Inc., own a significant portion of our assets and conduct substantially all of our operations. Each subsidiary is a distinct legal entity and, under certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from our subsidiaries. In the event Rovi Corporation does not receive distributions from its subsidiaries, it may be unable to make required principal and interest payments on its debt obligations, including the 2020 Convertible Notes. Accordingly, repayment of Rovi Corporation's indebtedness depends, to a significant extent, on the generation of cash flow by its subsidiaries, including Rovi Guides, Inc. and Rovi Solutions Corporation, the senior secured position of their bank debt, and their ability to make cash available to Rovi Corporation, by dividend, debt repayment or otherwise. Because they are not guarantors or a co-issuer of the 2020 Convertible Notes, Rovi Corporation’s subsidiaries do not have any obligation to pay amounts due on those notes or to make funds available for that purpose. Conversely, the ability of Rovi Solutions Corporation and Rovi Guides, Inc. to repay their indebtedness under our Term Loan Facility B depends, in part, on the generation of cash flow by their respective subsidiaries. Our subsidiaries may not be able to, or may not be permitted to, make distributions to enable us to make payments in respect of our indebtedness. Additionally, distributions from our non-U.S. subsidiaries may be subject to foreign withholding taxes and would be subject to U.S. federal and state income tax which could reduce the net cash available for principal and interest payments.
Despite our current level of indebtedness, we may incur more indebtedness. This could increase the risks associated with our indebtedness.
We and our subsidiaries may incur additional indebtedness in the future. The terms of our debt do not prohibit us or our subsidiaries from incurring additional indebtedness, although such debt terms impose restrictions on our ability to do so. If we incur any additional indebtedness that ranks equally with existing indebtedness, the holders of that indebtedness will be entitled to share ratably with the holders of our existing debt obligations in any proceeds distributed in connection with any insolvency, liquidation, reorganization, dissolution or other winding-up of us. If new indebtedness is added to our current debt levels, the related risks that we and our subsidiaries now face could intensify.
The nature of our business requires the application of complex revenue recognition rules. Significant changes in U.S. generally accepted accounting principles (“GAAP”) from the adoption of recently issued accounting standards could materially affect our financial position and results of operations.
The accounting rules and regulations we comply with regarding revenue recognition are complex. From time to time the Financial Accounting Standards Board (the “FASB”) modifies the accounting standards applicable to our financial statements. In May 2014, the FASB issued an amended accounting standard for revenue recognition, Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (“Topic 606”). Further, in April 2016, the FASB amended Topic 606 to provide additional guidance on revenue recognition as it pertains to licenses of intellectual property. Topic 606 and its related amendments are effective for us in the first quarter of 2018 and may be applied using a full retrospective or modified retrospective approach. We have not selected a transition method and continue to evaluate what effect, if any, the amendments and transition alternatives could have on our financial position and results of operations. Regardless of the transition method selected, application of the amended revenue recognition standard may significantly affect the amount and timing of revenue recognized. For example, pursuant to the amended revenue recognition standard, revenue from intellectual property licenses that are deemed functional in nature would generally be recognized when the customer begins to benefit from the intellectual property license, which is generally at inception of the license period, if the intellectual property is not considered distinct within the context of the contract. Under existing U.S. GAAP, such revenue is generally recognized ratably over the license term. In addition, some deferred revenue recognized in accordance with existing U.S. GAAP could be eliminated as part of the effect of adoption. While the adoption of Topic 606 does not change the cash flows received from our contracts with customers, the adoption of Topic 606 could have a material adverse effect on our financial position or results of operations.
We utilize non-GAAP reporting in our quarterly earnings press releases.
As part of our quarterly earnings press releases, we publish measures compiled in accordance with GAAP as well as non-GAAP financial measures along with a reconciliation between the GAAP and non-GAAP financial measures. The reconciling items adjust amounts reported in accordance with GAAP for certain items which are described in detail in each such quarterly earnings press release. We believe that our non-GAAP presentation may be meaningful to investors in analyzing our results of operations as this is how our business is managed. The market price of our stock may fluctuate based on future non-GAAP results if investors base their investment decisions on such non-GAAP financial measures. If we decide to alter or curtail the use of non-GAAP financial measures in our quarterly earnings press releases, the market price of our stock could be adversely affected if investors analyze our performance in a different manner.
Our investment portfolio is subject to risks which may cause losses and affect the liquidity of our investment portfolio.
Our investment portfolio includes various money market funds and marketable debt securities, such as corporate debt securities, U.S. Treasury and agency securities and foreign government obligations. Weakened financial markets have at times adversely impacted the general credit, liquidity, market prices and interest rates for these and other types of debt securities. Additionally, changes in monetary policy by the Federal Open Market Committee may cause a decrease in the purchasing power of the U.S. dollar and adversely affect our investment portfolio. Furthermore, if there is a default on or downgrade of the securities in our investment portfolio, our investment portfolio may be adversely impacted, requiring impairment charges that could adversely affect our financial position, results of operations or cash flows. The financial market and monetary risks associated with our investment portfolio may have a material adverse effect on our financial condition, liquidity, results of operations, or cash flows.
Risks Related to Our Business and Industry
If we fail to develop and timely deliver innovative technologies and services in response to changes in the technology and entertainment industries, our business could decline.
The markets for our products, services and technologies are characterized by rapid change and technological evolution. We will need to continue to expend considerable resources on research and development in the future in order to continue to design and deliver enduring, innovative entertainment products, services and technologies. Despite our efforts, we may not be able to develop timely and effectively market new products, technologies and services that adequately or competitively address the needs of the changing marketplace. In addition, we may not correctly identify new or changing market trends at an early enough stage to capitalize on market opportunities. At times, such changes can be dramatic, as were the shift from VHS videocassettes to DVDs for consumer playback of movies in homes and elsewhere and the transition from packaged media to internet distribution. Our future success depends to a great extent on our ability to develop and timely deliver innovative
technologies that are widely adopted in response to changes in the technology and entertainment industries and that are compatible with the technologies, services or products introduced by other entertainment industry participants.
Despite our efforts and investments in developing new products, services and technologies:
Our failure to successfully develop new and improved products, services and technologies, including as a result of any of the risks described above, may reduce our future growth and profitability and may adversely affect our business, results and financial condition.
Our business may be adversely affected by fluctuations in the number of cable television, telecommunications television, and digital broadcast satellite subscribers if the availability of OTT content services causes consumers to cancel their pay TV subscriptions.
For some of our technologies, we are paid a royalty based on the number of subscribers or set top-boxes our pay TV customers have. The ability to enjoy digital entertainment content downloaded or streamed over the internet has caused some consumers to elect to cancel their pay TV subscriptions. If our pay TV customers are unable to maintain their subscriber bases, the royalties they owe us may decline.
Our business may be adversely affected by fluctuations in demand for CE devices incorporating our technologies.
We derive significant revenues from CE manufacturer license fees for our solutions that are based on the number of units shipped. We primarily depend on the cooperation of CE manufacturers to incorporate our technologies into their products. Generally, our license agreements do not require manufacturers to include our technology in any specific number or percentage of units, and only some of these agreements guarantee a minimum aggregate license fee. Purchases of new CE devices, including television sets, integrated satellite receiver decoders, DVRs, DVD recorders, personal computers and internet appliances are largely discretionary and may be adversely impacted by increasing market saturation, durability of products in the marketplace, new competing products, alternate consumer entertainment options and general economic trends in the countries or regions in which these products are offered. Economic downturns have in the past, and may in the future, significantly impact demand for such CE devices. As a result, our future operating results may be adversely impacted by fluctuations in sales of CE devices employing our technologies.
The decision by manufacturers to incorporate our solutions into their products is a function of what other technologies, products and services are available. Our future operating results may be adversely impacted as a result of CE manufacturers opting not to incorporate our technology into their devices as a result of other available alternatives.
We are exposed to risks associated with our changing technology base through strategic acquisitions, investments and divestitures.
We have expanded our technology base in the past through strategic acquisitions of companies with complementary technologies or IP and intend to do so in the future. Acquisitions hold special challenges in terms of successful integration of technologies, products, services and employees. We may not realize the anticipated benefits of these acquisitions or the benefits of any other acquisitions we have completed or may complete in the future, and we may not be able to incorporate any acquired services, products or technologies with our existing operations, or integrate personnel from the acquired businesses, in which case our business could be harmed.
Acquisitions, divestitures and other strategic investments involve numerous risks, including:
Financing for future acquisitions may not be available on favorable terms, or at all. If we identify an appropriate acquisition candidate for any of our businesses, we may not be able to negotiate the terms of the acquisition successfully, finance the acquisition or integrate the acquired business, products, service offerings, technologies or employees into our existing business and operations. Future acquisitions and divestitures may not be well-received by the investment community, which may cause the value of our stock to fall. We cannot ensure that we will be able to identify or complete any acquisition or divestiture in the future. Further, the terms of our indebtedness constrains our ability to make and finance additional acquisitions or divestitures.
If we acquire businesses, new products, service offerings or technologies in the future, we may incur significant acquisition-related costs. In addition, we may be required to amortize significant amounts of finite-lived intangible assets and we may record significant amounts of goodwill or indefinite-lived intangible assets that would be subject to testing for impairment. We have in the past and may in the future be required to write off all or part of the intangible assets or goodwill associated with these investments that could harm our operating results. If we consummate one or more significant future acquisitions in which the consideration consists of stock or other securities, our existing stockholders' ownership could be significantly diluted. If we were to proceed with one or more significant future acquisitions in which the consideration included cash, we could be required to use a substantial portion of our cash and investments. Acquisitions could also cause operating margins to fall depending on the businesses acquired.
Our strategic investments may involve joint development, joint marketing, or entry into new business ventures, or new technology licensing. Any joint development efforts may not result in the successful introduction of any new products or services by us or a third party, and any joint marketing efforts may not result in increased demand for our products or services. Further, any current or future strategic acquisitions and investments by us may not allow us to enter and compete effectively in new markets or enhance our business in our existing markets and we may have to impair the carrying amount of our investments.
Our success is heavily dependent on our proprietary technologies.
We believe that our future success will depend on our ability to continue to introduce proprietary solutions for digital content and technologies. We rely on a combination of patent, trademark, copyright and trade secret laws, nondisclosure and other contractual provisions, and technical measures to protect our IP rights. Our patents, trademarks and copyrights may be challenged and invalidated or circumvented. Our patents may not be of sufficient scope or strength or be issued in all countries where products or services incorporating our technologies can be sold. We have filed applications to expand our patent claims and for improvement patents to extend the current periods of patent coverage. However, expiration of some of our patents may harm our business. If we are not successful in protecting our IP, our business would be harmed.
Others may develop technologies that are similar or superior to our technologies, duplicate our technologies or design around our patents. Effective IP protection may be unavailable or limited in some foreign countries. Despite efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise use aspects of processes and devices that we regard as proprietary. Policing unauthorized use of our proprietary information is difficult, and the steps we have taken may not prevent misappropriation of our technologies. Such competitive threats could harm our business.
Our ability to maintain and enforce our trademark rights has a large impact on our ability to prevent third party infringement of our brand and technologies and if we are unable to maintain and strengthen our brands, our business could be harmed.
Maintaining and strengthening our brands is important to maintaining and expanding our business, as well as to our ability to enter into new markets for our technologies, products and services. If we fail to promote and maintain these brands successfully, our ability to sustain and expand our business and enter into new markets may suffer. Much of the promotion of our brand depends, among other things, on hardware device manufacturing companies and service providers displaying our trademarks on their products. If these companies choose for any reason not to display our trademarks on their products, or if these companies use our trademarks incorrectly or in an unauthorized manner, the strength of our brand may be diluted or our ability to maintain or increase our brand awareness may be harmed. We generally rely on enforcing our trademark rights to prevent unauthorized use of our brand and technologies. Our ability to prevent unauthorized uses of our brand and technologies would be negatively impacted if our trademark registrations were overturned in the jurisdictions where we do business. We also have trademark applications pending in a number of jurisdictions that may not ultimately be granted, or if granted, may be challenged or invalidated, in which case we would be unable to prevent unauthorized use of our brand and logo in such jurisdiction. We have not filed trademark registrations in all jurisdictions where our brand and logo are used.
We may not be able to join standards bodies, license technologies or integrate with platforms that are necessary or helpful to our product or services businesses because of the encumbrances that the proposed associated agreements place on our patents.
Standards bodies often require, as a condition of joining such bodies, that potential members license, agree to license, disclose or place other burdens on their patents. Similarly, technology licensors and platform operators often require that licensees cross license, or agree not to assert, their patents. In order to develop, provide or distribute certain products or services, we may find it necessary or helpful to join these standard bodies, license these technologies or contract with these platform operators. However, in order to do so, we might have to sign agreements under which we would have to license or agree not to assert patents without being able to collect royalties or for fees that we believe are less than those that we could otherwise collect. Similarly, these agreements could require us to disclose invention-related information that we would otherwise prefer to keep confidential. If we choose not to be part of standards bodies, to license certain technologies, or to contract with certain platform operators, our business could be harmed.
For our business to succeed, we need to attract and retain qualified employees and manage our employee base effectively.
Our success depends on our ability to hire and retain qualified employees and to manage our employee base effectively. Because of the specialized nature of our business, our future success will depend on our continuing ability to identify, attract, train and retain highly skilled managerial, technical, sales and marketing personnel, particularly as we enter new markets. Competition for people with the skills that we require is intense, particularly in the San Francisco Bay Area, where our headquarters are located, and in Southern California where we have significant operations, and the high cost of living in these areas makes our recruiting and compensation costs higher. Moreover, changes in our management or executive leadership team could lead to disruption of our business or distraction of our employees as the organization adapts to such management changes. If we are unable to hire and retain qualified employees, our business and operating results could be adversely affected.
Qualifying, certifying and supporting our technologies, products and services is time consuming and expensive.
We devote significant time and resources to qualify and support our software products on various personal computer, CE and mobile platforms, including operating systems from Apple, Google and Microsoft. In addition, we maintain high-quality standards for products that incorporate our technologies and products through a quality control certification process. To the extent that any previously qualified, certified and/or supported platform or product is modified or upgraded, or we need to qualify, certify or support a new platform or product, we could be required to expend additional engineering time and resources, which could add significantly to our development expenses and adversely affect our operating results.
The success of certain of our solutions depends on the interoperability of our technologies with consumer hardware devices.
To be successful, we design certain of our solutions to interoperate effectively with a variety of consumer hardware devices, including personal computers, DVD players and recorders, Blu-ray players, digital still cameras, digital camcorders, portable media players, digital TVs, home media centers, set-top boxes, video game consoles, MP3 devices, multi-media
storage devices, mobile tablets and smartphones. We depend on significant cooperation with manufacturers of these devices and the components integrated into these devices, as well as software providers that create the operating systems for such devices, to incorporate certain of our technologies into their product offerings and ensure consistent playback of encoded files. Currently, a limited number of devices are designed to support certain of our technologies. If we are unsuccessful in causing component manufacturers, device manufacturers and software providers to integrate certain of our technologies into their product offerings, those technologies may become less accessible to consumers, which would adversely affect our revenue potential.
We have made and expect to make significant investments in infrastructure which, if ineffective, may adversely affect our business results.
We have made and expect to make significant investments in infrastructure, tools, systems, technologies and content, including initiatives relating to digital asset and rights management, cloud-based systems and technologies and data warehouses, aimed to create, assist in the development or operation of, or enhance our ability to deliver innovative products and services across multiple media, digital and emerging platforms. These investments may ultimately cost more than is anticipated, their implementation may take longer than expected and they may not meaningfully contribute to or result in successful new or enhanced products, services or technologies.
Our products and services could be susceptible to errors, defects, or unintended performance problems that could result in lost revenues, liability or delayed or limited market acceptance.
We develop and offer complex solutions, which we license and otherwise provide to customers. The performance of these solutions typically involves working with sophisticated software, computing and communications systems. Due to the complexity of these products and services, and despite our quality assurance testing, the products may contain undetected defects or errors that may affect the proper use or application of such products or services by the customer. Because certain of our products and services are embedded in digital content and other software, or rely on stable transmissions, our solutions' performance could unintentionally jeopardize our customers' product performance. Because customers rely on our products and services as used in their software and applications, defects or errors in our products or services may discourage customers from purchasing our products or services. These defects or errors could also result in product liability, service level agreement claims or warranty claims. Although we attempt to reduce the risk of losses resulting from these claims through warranty disclaimers and limitation of liability clauses in our agreements, these contractual provisions may not be enforceable in every instance. Any such defects, errors, or unintended performance problems in existing or new products or services, and any inability to meet customer expectations in a timely manner, could result in loss of revenue or market share, failure to achieve market acceptance, diversion of development resources, injury to our reputation, increased insurance costs and increased service costs, any of which could materially harm our business.
Business interruptions could adversely affect our future operating results.
The provision of certain of our products and services depends on the continuing operation of communications and transmission systems and mechanisms, including satellite, cable, wire, internet, over the air broadcast communications and transmission systems and mechanisms. These communication and transmission systems and mechanisms are subject to significant risks and any damage to or failure of these systems and mechanisms could result in an interruption of the provision of our products and services.
Several of our major business operations are subject to interruption by earthquake, fire, power shortages, terrorist attacks and other hostile acts, and other events beyond our control. The majority of our research and development activities, our corporate headquarters, our principal information technology systems, and other critical business operations are located near major seismic faults. Our operating results and financial condition could be materially harmed in the event of a major earthquake or other natural or man-made disaster that disrupts our business. The communications and transmission systems and mechanisms that we depend on are not fully redundant, and our disaster recovery planning cannot account for all eventualities.
If we fail to maintain proper and effective internal controls, our ability to produce accurate financial statements could be impaired, which could increase our operating costs and affect our ability to operate our business.
We have a complex business that is international in scope. Ensuring that we have adequate internal controls and procedures in place to help ensure that we can produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently. We are continually in the process of documenting, reviewing and, if appropriate, improving our internal controls and procedures in connection with Section 404 of the Sarbanes-Oxley Act of 2002, which requires annual management assessments of the effectiveness of our internal control over financial reporting and a report
by our independent registered public accountants on the effectiveness of our internal controls over financial reporting. If we or our independent registered public accountants identify areas for further attention or improvement, implementing any appropriate changes to our internal controls may require specific compliance training of our directors, officers and employees, entail substantial costs in order to modify our existing accounting systems, and take a significant period of time to complete. We have in the past identified, and may in the future identify, significant deficiencies in the design and operation of our internal controls, which have been or will in the future need to be remediated. Furthermore, our independent registered public accountants may interpret the Section 404 requirements and the related rules and regulations differently from how we interpret them, or our independent registered public accountants may not be satisfied with our internal control over financial reporting or with the level at which these controls are documented, operated or reviewed in the future. Finally, in the event we make a significant acquisition, or a series of smaller acquisitions, we may face significant challenges in implementing the required processes and procedures in the acquired operations. As a result, our independent registered public accountants may decline or be unable to report on the effectiveness of our internal controls over financial reporting or may issue a qualified report in the future. This could result in an adverse reaction in the financial markets due to investors' perceptions that our internal controls are inadequate or that we are unable to produce accurate financial statements.
We will incur costs and demands on management as a result of complying with the laws and regulations affecting public companies, which could affect our operating results.
We have incurred, and expect to continue to incur, significant legal, accounting and other expenses associated with corporate governance and public company reporting requirements, including complying with the requirements of the Sarbanes-Oxley Act of 2002, as well as rules implemented by the SEC and NASDAQ. As long as the SEC requires the current level of compliance or more for public companies of our size, we expect these rules and regulations to require significant legal and accounting compliance costs and to make some activities time-consuming and costly. These rules and regulations may make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage than was previously available. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as our executive officers.
If we fail to comply with the laws and regulations relating to the collection of sales tax and payment of income taxes in the various states and foreign jurisdictions in which we do business, we could be exposed to unexpected costs, expenses, penalties, and fees as a result of our noncompliance in which case our business could be harmed.
As our business grows and expands, we have started to do business in an increasing number of states nationally and foreign jurisdictions. By engaging in business activities in these states and foreign jurisdictions, we become subject to their various laws and regulations, including possible requirements to collect sales tax from our sales within those states and foreign jurisdictions and the payment of income taxes on revenue generated from activities in those states and foreign jurisdictions. The laws and regulations governing the collection of sales tax and payment of income taxes are numerous, complex, and vary among states and foreign jurisdictions. If we fail to comply with these laws and regulations requiring the collection of sales tax and payment of income taxes in one or more states and foreign jurisdictions where we do business, we could be subject to significant costs, expenses, penalties, and fees in which case our business would be harmed.
Because many of our technologies, products and services are designed to comply with industry standards, to the extent we cannot distinguish our technologies, products and services from those sold by our competitors, our current distributors and customers may choose alternate technologies, products and services or choose to purchase them from multiple vendors.
We cannot provide any assurance that the industry standards for which we develop new technologies, products and services will allow us to compete effectively with companies possessing greater financial and technological resources than we have to market, promote and exploit sales opportunities as they arise in the future. Technologies, products and services that are designed to comply with standards may also be viewed as interchangeable commodities by certain customers. We may be unable to compete effectively if we cannot produce technologies, products and services more quickly or at lower cost than our competitors. Further, any new technologies, products and services developed may not be introduced in a timely manner or in advance of our competitors' comparable offerings and may not achieve the broad market acceptance necessary to generate significant revenues.
Our competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements than we do, which could reduce demand for our products or services or render them obsolete and if competition increases or if we are unable to effectively compete with existing or new competitors, the result could be price reductions, fewer customers and loss of market share, any of which could result in less revenue and harm our business.
Our IPGs face competition from companies that produce and market program guides as well as television schedule information in a variety of formats, including passive and interactive on-screen electronic guide services, online listings, over the top applications, printed television guides in newspapers and weekly publications, and local cable television guides.
Our IPG products also compete against customers and potential customers who choose to build their own IPG, including both those who do and those who don't elect to license our patents.
We believe that our set-top box digital-to-analog copy protection, DVD digital-to-analog copy protection and videocassette copy protection systems currently have limited competition. It is possible, however, that alternative copy protection technologies could become competitive. Additionally, new competitors or alliances among competitors may emerge and rapidly acquire significant market share in any of these areas. It is also possible that the overall demand for copy protection systems may decline more quickly than anticipated.
The markets for the consumer hardware and software products sold by our customers are competitive and price sensitive. Licensing fees for our technologies, products and services, particularly in the physical media, CE and personal computer areas, may decline due to competitive pricing pressures and changing consumer demands. In addition, we may experience pricing pressures in other parts of our business. These trends could make it more difficult for us to increase or maintain our revenue and could adversely affect our operating results. To increase per unit royalties, we must continue to introduce new, highly functional versions of our technologies, products and services for which we can charge higher amounts. Any inability to introduce such technologies, products and services in the future or other declines in the amounts we can charge would also adversely affect our revenues.
Some of our current or future competitors may have significantly greater financial, technical, marketing and other resources than we do, may enjoy greater brand recognition than we do, or may have more experience or advantages than we have in the markets in which they compete. Further, many of the consumer hardware and software products that include our technologies also include technologies developed by our competitors. As a result, we must continue to invest significant resources in product development in order to enhance our technologies and our existing products and services and introduce new high-quality technologies, products and services to meet the wide variety of such competitive pressures. Our ability to generate revenues from our business will suffer if we fail to do so successfully.
We face a number of competitive challenges in the sale and marketing of the TiVo service direct to retail consumers as well as to our service provider customers.
The DVR and advanced television solutions market is rapidly evolving, and we face significant competition. Moreover, the market for in-home entertainment is intensely competitive and subject to rapid technological change. As a result of this intense competition, we could incur increased subscription acquisition costs that could adversely affect our retail consumer business in the future. If new technologies (such as internet streaming) render the retail DVR market obsolete, we may be unable to generate sufficient revenue to cover the expenses and obligations in our retail consumer business.
Our service provider revenues depend both upon our ability to successfully negotiate agreements with service provider customers and, in turn, upon our customers' successful commercialization of our licensed products and technology through their marketing of the TiVo service and related DVRs to consumers.
We compete with other consumer electronics products and home entertainment services for consumer spending. DVRs and the TiVo service compete in markets that are crowded with other consumer electronics products and home entertainment services. The competition for consumer spending is intense, and many consumers may choose other products and services over ours. DVRs compete for consumer spending with products such as DVD players, satellite television systems, personal computers, video game consoles, and other dedicated over-the-top video streaming devices (such as Roku, AppleTV, and Amazon Fire TV). The TiVo service competes with home entertainment services such as cable and satellite television, movie rentals, pay-per-view, video on demand, and mail-order DVD services. Such competition could harm our business, financial condition, and results of operations.
Many of these products or services have established markets, broad user bases, and proven consumer acceptance. In addition, many of the manufacturers and distributors of these competing devices and services have substantially greater brand recognition, market presence, distribution channels, advertising and marketing budgets and promotional activities, and more strategic partners. Faced with this competition, we may be unable to effectively differentiate our products, including DVRs, and the TiVo service from other consumer electronics devices or entertainment services and our business, financial condition, and results of operations would be harmed.
Consumers may not be willing to pay for our products and services, we may be forced to discount our products and services, and we may introduce products and services at lower price points which could adversely impact our revenues. Many of our customers already pay monthly fees for cable or satellite television. We must convince these consumers to pay a separate subscription fee to receive the TiVo service. Consumers may perceive the TiVo service and related DVR and non-DVR products as too expensive. In order to continue to grow our subscription base, we have lowered the price of our DVRs in the past and raised our subscription pricing and alternatively we may choose to raise our DVR pricing and lower our subscription pricing in the future. As a result of lower hardware pricing and higher subscription pricing, the profitability of such newly acquired customers was shifted outward in time as we need to first recoup the expenses incurred in connection with the sale of a heavily subsidized DVR. For competitive and financial reasons, we may need to change the pricing of our DVRs and our service fees again in the future. Furthermore, we have introduced non-DVR products such as TiVo Mini meant to expand the TiVo experience throughout the home, but such a product has a lower hardware cost and lower associated service fees and it may impact our total revenues as well as our ARPU per subscription to the extent these products are offered at lower subscription price points. The availability of competing services that do not require subscription fees or that are enabled by low or no cost DVRs will harm our ability to effectively attract and retain subscriptions, and in such an event our retail consumer business would be harmed.
Growth in our TiVo-Owned subscriptions and related revenues could be harmed by offerings by our television distribution partners who also would be able to offer the TiVo service in the future. Our ability to grow our TiVo-Owned subscriptions and related revenues could be harmed by competition from our television distribution partners, such as RCN, Suddenlink, and others, who may be able to offer TiVo-branded DVR and non-DVR solutions to their customers at more attractive pricing than we may be able to offer the TiVo service to our TiVo-Owned customers. Furthermore, if we are unable to sufficiently differentiate the TiVo service offered direct to consumers by TiVo from the TiVo-branded DVR solutions offered by our licensing partners, customers who would have otherwise chosen the TiVo service offered direct to consumers by us may instead choose to purchase the TiVo-branded DVR solution from our licensing partners. Additionally, to the extent that potential customers defer subscribing to the TiVo service in order to wait for announced, but not yet deployed in their geographic area, TiVo-branded DVR solutions from our licensing partners, the growth of our TiVo-Owned subscriptions could be reduced. If the number of our TiVo-Owned subscriptions fails to grow or decreases in the future, our retail consumer business will be harmed.
It is expensive to establish a strong brand. We believe that establishing and strengthening the TiVo brand is critical to achieving widespread acceptance of our products and services and to establishing key strategic relationships. The importance of brand recognition will increase as current and potential competitors enter the advanced television services market with competing products and services. Our ability to promote and position our brand depends largely on the success of our marketing efforts and our ability to provide high quality services and customer support. These activities are expensive and we may not generate a corresponding increase in subscriptions or revenues to justify these costs. If we fail to establish and maintain our brand, or if our brand value is damaged or diluted, we may be unable to attract subscriptions and effectively compete in the DVR market.
We rely on our retail partners and service providers to market and distribute our products and services. In addition to our own efforts, our retail partners distribute our products that enable the TiVo service. We rely on their sales forces, marketing budgets, and brand images to promote and support our products and the TiVo service. Additionally, we now have arrangements with many service providers, both domestically and internationally, to market and promote the TiVo service. We expect to continue to rely on our relationships with these companies to promote and support DVRs and other devices that enable the TiVo service. The loss of one or more of these companies or the failure of one or more of these companies to provide anticipated marketing support could require us to undertake more of these activities on our own. Further, if any of our service providers elect to support a competing technology, our business could be harmed despite the fact that many of our agreements with our service providers include exclusivity provisions, minimum deployment commitments, or minimum financial commitments. As a result, we would spend significant resources to support the TiVo service and the DVRs and other devices that enable the TiVo service or we would otherwise see a reduction in new and existing service provider deployments from such service providers. If we are unable to provide adequate marketing support for our products and the TiVo service, our ability to attract additional subscriptions to the TiVo service will be limited.
We face competitive risks in the provision of an entertainment offering involving the distribution of digital content through broadband, including from broadband devices connected directly to the TV or through a PC or other device connected to the TV or to mobile devices.
We have previously launched access to the entertainment offerings of Amazon Video, Netflix, Hulu Plus, VUDU, Pandora and others for the distribution of digital content directly to broadband-connected TiVo devices. Our offerings with Amazon Video, Netflix, Hulu Plus, Pandora and others typically involve no significant long-term commitments. We face competitive, technological, and business risks in our ongoing provision of an entertainment offering involving the distribution of digital content through broadband to consumer televisions with Amazon, Netflix and others, including the availability of premium and high-definition content, as well as the speed and quality of the delivery of such content to TiVo devices. For instance, we face increased competition from a growing number of broadband-enabled devices from providers such as Roku, AppleTV, Amazon, and Google that provide broadband delivered digital content directly to a consumer's television connected to such a device. Additionally, we face competition from online content providers and other PC software providers who deliver digital content directly to a consumer's personal computer, which in some cases may then be viewed on a consumer's television. If we are unable to provide a competitive entertainment offering with Amazon Video, Netflix, Hulu Plus, Pandora, and our other partners, on our own, or an equivalent offering with other third-parties, the attractiveness of the TiVo service to new subscribers would be harmed as consumers increasingly look for new ways to receive and view digital content and our ability to retain and attract subscribers would be harmed.
Establishing and maintaining licensing relationships with companies are important to build and support a worldwide entertainment technology licensing ecosystem and to expand our business, and failure to do so could harm our business and prospects.
Our future success depends on our ability to establish and maintain licensing relationships with companies in related business fields, including:
Substantially all of our license agreements are non-exclusive, and therefore our licensees are free to enter into similar agreements with third parties, including our competitors. Our licensees may develop or pursue alternative technologies either on their own or in collaboration with others, including our competitors.
Some of our third party license arrangements require that we license others' technologies and/or integrate our solutions with others. In addition, we rely on third parties to report usage and volume information to us. Delays, errors or omissions in this information could harm our business. If these third parties choose not to support integration efforts or delay the integration of our solutions, our business could be harmed.
If we fail to maintain and expand our relationships with a broad range of participants throughout the entertainment industry, including motion picture studios, broadcasters, pay TV operators and manufacturers of CE products, our business and prospects could be materially harmed. Relationships have historically played an important role in the entertainment industries that we serve. If we fail to maintain and strengthen these relationships, these industry participants may not purchase and use our technologies, which could materially harm our business and prospects. In addition to directly providing a substantial portion of our revenue, these relationships are also critical to our ability to have our technologies adopted. Moreover, if we fail to maintain our relationships, or if we are not able to develop relationships in new markets in which we intend to compete in the future, including markets for new technologies and expanding geographic markets, our business, operating results and prospects could be materially and adversely affected. In addition, if major industry participants form strategic relationships that exclude us, our business and prospects could be materially adversely affected.
We generate a significant portion of our revenue from patent license agreements with a small number of major pay TV operators which would lead to substantial revenue loss and possible litigation if not renewed.
We generate a significant amount of revenue from our contracts with AT&T, Charter and Comcast. In December 2015, our contract with AT&T was extended to December 2022. In June 2016, we amended our license agreement with Charter Communications to cover Time Warner Cable. Our contract with Comcast expired in March 2016 and we filed litigation against Comcast for patent infringement in April 2016. The expiration of our license with Comcast, as well as litigation initiated against Comcast, may result in a reduction of revenue and an increase in litigation costs. We cannot assure you that the resolution with Comcast will be on terms acceptable to us. And while the Company anticipates that Comcast will eventually execute a new license, the length of time that Comcast is out of license prior to executing a license is uncertain. In addition, the amount of revenue recognized in the reporting period a license is executed is uncertain and will depend on a variety of factors including license terms such as duration, pricing, licensed products and fields of use, and the duration of the out-of-license period. In addition, while litigation costs may increase, whether the litigation initiated against Comcast will cause total expenses to increase or decrease longer-term will be a function of several factors, including the length of time Comcast is out of license. Furthermore, we cannot assure you that these license agreements with major pay TV operators will not be terminated under certain circumstances. If that occurs and we are unable to replace the revenue associated with these agreements through similar or other business arrangements, our revenues and profit margins would decline and our business would be harmed as a result.
Some software we provide may be subject to “open source” licenses, which may restrict how we use or distribute our software or require that we release the source code of certain products subject to those licenses.
Some of the products we support and some of our proprietary technologies incorporate open source software such as open source codecs that may be subject to the Lesser Gnu Public License or other open source licenses. The Lesser Gnu Public License and other open source licenses may require that source code subject to the license be released or made available to the public. Such open source licenses may mandate that software developed based on source code that is subject to the open source license, or combined in specific ways with such open source software, become subject to the open source license. We take steps to ensure that proprietary software we do not wish to disclose is not combined with, or does not incorporate, open source software in ways that would require such proprietary software to be subject to an open source license. However, few courts have interpreted the Lesser Gnu Public License or other open source licenses, and the manner in which these licenses may be interpreted and enforced is therefore subject to some uncertainty. We often take steps to disclose source code for which disclosure is required under an open source license, but it is possible that we have or will make mistakes in doing so, which could negatively impact our brand or our adoption in the community, or could expose us to additional liability. In addition, we rely on multiple software programmers to design our proprietary products and technologies. Although we take steps to ensure that our programmers (both internal and outsourced) do not include open source software in products and technologies we intend to keep proprietary, we cannot be certain that open source software is not incorporated into products and technologies we intend to keep proprietary. In the event that portions of our proprietary technology are determined to be subject to an open source license, or are intentionally released under an open source license, we could be required to publicly release the relevant portions of our source code, which could reduce or eliminate our ability to commercialize our products and technologies. Also, in relying on multiple software programmers to design products and technologies that we intend, or ultimately end up releasing in the open source community, we may discover that one or multiple such programmers have included code or language that would be embarrassing to us, which could negatively impact our brand or our adoption in the community, or could expose us to additional liability. Such additional liability could include claims that result in litigation, require us to seek licenses from third-parties in order to keep offering our software, require us to re-engineer our software, require us to release proprietary source code, require us to provide indemnification or otherwise subject us to liability to a customer or supplier, or require us to discontinue the sale of a product in the event re-engineering cannot be accomplished in a timely manner, any of which could adversely affect our business.
Some terms of our agreements with licensees could be interpreted in a manner that could adversely affect licensing revenue under those agreements.
Some of our license agreements contain “most favored nation” clauses. These clauses typically provide that if we enter into an agreement with another licensee on more favorable terms, we must offer some of those terms to our existing licensees. We have entered into a number of license agreements with terms that differ in some respects from those contained in other agreements. These agreements may obligate us to provide different, more favorable, terms to licensees, which could, if applied, result in lower revenues or otherwise adversely affect our business, financial condition, results of operations. While we believe that we have appropriately complied with the most favored nation terms included in our license agreements, these contracts are complex and other parties could reach a different conclusion that, if correct, could have an adverse effect on our financial condition or results of operations.
Limitations on control of our IPG Inc. joint venture may adversely impact our operations in Japan.
We hold a 46% interest in IPG Inc., as a joint venture with non-affiliated third parties, which hold the remaining interest. As a result of such arrangement, we may be unable to control the operations, strategies and financial decisions of IPG Inc. which could in turn result in limitations on our ability to implement strategies that we may favor, or to cause dividends or distributions to be paid. In addition, our ability to transfer our interests in IPG Inc. may be limited under the joint venture arrangement.
We generate a significant amount of revenue from our settlement agreements with DISH, AT&T and Verizon and our agreement with DIRECTV which expire in 2018, and if we are unable to renew or replace these revenues, our business would be harmed.
In 2011, TiVo Solutions entered into a settlement and patent license agreement with DISH and in 2012 we entered into settlement and patent license agreements with AT&T and Verizon. The agreements with DISH, AT&T and Verizon will generate recurring revenues for us until 2018. We generate a significant amount of revenues as a result of these settlement and patent license agreements. If we are unable to renew or replace these revenues through similar or other business arrangements, our revenues would decline and our business would be harmed as a result.
Our contract for TiVo service and software with DIRECTV, which was acquired by AT&T, expires on February 15, 2018. We cannot assure you that our license agreement with DIRECTV will be renewed on terms acceptable to us or at all. If we are unable to replace the revenue associated with this agreement through similar or other business arrangements, our revenues and profit margins would decline and our business would be harmed as a result. While it is our intent to renew both our DIRECTV and AT&T agreements, as a result of AT&T's acquisition of DIRECTV, the timing and structure of such renewals with AT&T/DIRECTV could have a negative impact on our future revenues. We also cannot assure you that these license agreements will be renewed. Additionally, we may become involved in litigation with these licensees in connection with attempting to negotiate new agreements. The existence and/or outcome of such litigation could harm our business.
Dependence on the cooperation of pay TV operators, television broadcasters, hardware manufacturers, data providers and delivery mechanisms could adversely affect our revenues.
We rely on third party providers to deliver our IPG data to some of the CE devices that include our IPG. Further, our national data network provides customized and localized listings to our IPG service for pay TV and licensees of our data used in third party IPGs for pay TV. In addition, we purchase certain Metadata from commercial vendors that we redistribute. The quality, accuracy and timeliness of that Metadata may not continue to meet our standards or be acceptable to consumers. There can be no assurance that commercial vendors will distribute data to us without error or that the agreements that govern some of these relationships can be maintained on favorable economic terms. Technological changes may also impede the ability to distribute Metadata. Our inability to renew these existing arrangements on terms that are favorable to us, or enter into alternative arrangements that allow us to effectively transmit our Metadata to CE devices could have a material adverse effect on our CE IPG and IPG data business.
We are dependent on third parties for Metadata, third party images and content.
We distribute, as a revenue generating activity, Metadata. In the future, we may not be able to obtain this content, or may not be able to obtain it on the same terms. Such a failure to obtain the content, or obtain it on the same terms, could damage the attractiveness of our Metadata offerings to our customers, or could increase the costs associated with providing our Metadata offerings, and could thus cause revenues or margins to decrease.
We depend on a limited number of third-parties to manufacture, distribute, and supply critical components, technologies, assemblies, and services for the products that enable the TiVo service. We may be unable to operate our business if these parties do not perform their obligations or we are unable to incorporate such critical components or technologies into our products.
The TiVo service is enabled through the use of products, including DVR and non-DVR products, manufactured for us by a third-party contract manufacturer. In addition, we rely on sole suppliers for a number of key components and technologies for these DVRs and other devices we manufacture. We also rely on third-parties with whom we outsource supply-chain activities related to inventory warehousing, order fulfillment, distribution, and other direct sales logistics. We cannot be sure that these parties will perform their obligations as expected or that any revenue, cost savings, or other benefits will be derived from the efforts of these parties. If any of these parties breaches or terminates its agreement with us or otherwise fails to perform its obligations in a timely manner or we are unable to purchase or license such third party components or technologies,
we may be delayed or prevented from commercializing our products and services. Because our relationships with these parties are non-exclusive, they may also support products and services that compete directly with us, or offer similar or greater support to our competitors. Any of these events could require us to undertake unforeseen additional responsibilities or devote additional resources to commercialize our products and services or require us to remove certain features or functionalities from our products which may decrease the commercial appeal of our products for our customers. Any of these outcomes would harm our ability to compete effectively and achieve increased market acceptance and brand recognition.
In addition, we face the following risks in relying on these third-parties:
Unsuccessful or lost manufacturing relationships. If our manufacturing relationships are not successful, we may be unable to satisfy demand for our products and services. We manufacture DVRs and non-DVRs that enable the TiVo service through a third-party contract manufacturer, Flextronics. Delays, product shortages, and other problems could impair our distribution and brand image and make it difficult for us to attract subscriptions and service our Pay-TV Operator customers. In addition, as we are dependent on Flextronics as our sole third-party contract manufacturer, the loss of this manufacturer would require us to identify and contract with alternative sources of manufacturing, which we may be unable to do or which could prove time-consuming and expensive.
Dependence on sole suppliers and third party components and technologies. We are dependent on sole suppliers for key components, technologies and services. If these suppliers fail to perform their obligations or we are unable to purchase or license such third party components, technologies or services, we may be unable to find alternative suppliers or deliver our products and services to our customers on time or with the features and functionality they expect. We currently rely on sole suppliers for a number of the key components used in the TiVo-enabled DVRs and the TiVo service, of which we may not have written supply agreements with certain sole suppliers for key components or services for our products. For example, Broadcom Corporation ("Broadcom") is the sole supplier of the system controller for our DVR. We do not currently have a long-term written supply agreement with Broadcom although we do have limited rights to continue to purchase from Broadcom in the event Broadcom notifies us a product is being discontinued. Therefore, Broadcom is not contractually obligated to supply us with these key components on a long-term basis or at all. In addition, because we are dependent on sole suppliers for key components and services, our ability to manufacture our DVRs and other devices is subject to increased risks of supply shortages (without immediately available alternatives), exposure to unexpected cost increases in such sole supplied components, as well as other risks to our business if we were to fail to comply with conflict mineral requirements due to our reliance on these suppliers. Additionally, certain features and functionalities of our TiVo service and DVRs are dependent on third party components and technologies. If we are unable to purchase or license such third party components or technologies, we would be unable to offer certain related features and functionalities to our customers. In such a case, the desirability of our products to our customers could be reduced, thus harming our business.
If our arrangements with Broadcom or with our third-party contract manufacturer or other suppliers of critical third party components or technologies were to terminate or expire without a replacement arrangement in place, or if we or our manufacturers were unable to obtain sufficient quantities of these components, technologies, or required program guide data from our suppliers, our search for alternate suppliers could result in significant delays, added expense or disruption in product or service availability.
We depend upon third-parties to provide supply chain services related to inventory management, order fulfillment, and direct sales logistics. We rely on third-party vendors to provide cost-effective and efficient supply chain services. Among other activities, these outsourced services relate to direct sales logistics, including order fulfillment, inventory management and warehousing, and distribution of inventory to third-party retailers. If one or several of our third-party supply chain partners were to discontinue services for us, our ability to fulfill direct sales orders and distribute inventory timely, cost effectively, or at all, would be hindered which could in turn harm our business.
We are dependent on our major retail partners for distribution of our hardware products to consumers. We currently rely on our relationships with major retail distributors including Best Buy, Amazon, and others for distribution of TiVo-enabled DVRs and non-DVR products. We do not typically enter into long-term volume commitments with our major retail distributors. If one or several of our major retail partners were to discontinue selling our products, the volume of TiVo-enabled DVRs and non-DVR products sold to consumers could decrease which could in turn harm our business.
If cable operators were to cease supporting and providing CableCARDs to consumers or cable operators were to transmit television programs using technology that prevents our retail products from receiving and displaying television programs, the functionality of our current retail products would be severely limited, in which case our business would be harmed.
The FCC’s rules currently require the cable industry in the United States to provide access to digital high definition television signals to retail products by supplying separable security functionality to decrypt encrypted signals. Traditionally, cable operators have satisfied this separable security requirement by supplying CableCARD conditional access security cards. We rely on cable operators to supply CableCARDs for certain types of our DVRs to receive encrypted digital television signals without a cable operator supplied set-top box. With the limited exception of high definition over the air broadcast channels, our DVRs presently are limited to using CableCARDs to access digital cable, high definition, and premium cable channels (such as HBO) that are delivered in a linear fashion where all programs are broadcast to all subscribers all the time. Our retail cable products are unable to access the encrypted digital television signals of satellite providers such as DIRECTV and DISH as well as alternative television service providers such as AT&T U-verse and Google Fiber. And without CableCARDs, there presently is no alternative way for us to sell a retail cable product that works across cable systems nationwide. Furthermore, to the extent more pay TV customers obtain television service from satellite television providers and alternative television providers such as AT&T U-verse and Google Fiber, the desirability of our retail products and service will be harmed.
In December 2014, Congress passed the Satellite Television Extension and Localism Act Reauthorization ("STELAR"). Among other things, STELAR repealed an FCC requirement that cable operators employ separable security (i.e., CableCARDs) in the set-top boxes they lease to their subscribers effective December 4, 2015. STELAR did not address the FCC's requirement that cable operators provide separable security to retail devices and the cable industry has represented to Congress that it would continue to provide and support retail CableCARD devices in compliance with the separable security requirement. However, if operator-leased devices do not continue to rely on CableCARDs, the prices charged by operators to consumers whose devices continue to rely on CableCARDs could increase and support for retail CableCARD devices could deteriorate.
As part of STELAR, the FCC Chairman established a working group of technical experts, including a representative from TiVo, representing a wide range of stakeholders, to identify, report, and recommend performance objectives, technical capabilities, and technical standards of a not unduly burdensome uniform, and technology and platform neutral software based downloadable security system designed to allow retail devices to access multichannel video programming.
The working group submitted its report to the FCC on August 28, 2015. On February 18, 2016, the FCC initiated a proceeding proposing rules intended to allow companies to build retail devices or software solutions that can navigate the universe of multichannel video programming with a competitive user interface while also requiring continued support for retail CableCARD devices. If cable operators were to cease supporting and providing CableCARDs to consumers without providing TiVo with a commercially viable alternative method of accessing digital cable, high definition, and premium cable channels that works across cable systems nationwide, we would be unable to sell most of our current retail products, may be unable to create future retail products that receive pay TV programming, and our business would be harmed as the market for devices which only receive over the air broadcast television signals is significantly smaller than the current pay TV market. In June 2016, the cable industry proposed an alternative to the FCC’s proposed rules. The cable industry proposal involved the use of apps to allow consumers access to subscription-based video programming directly on their internet-connected televisions and other television-connected devices. We objected to the cable industry proposal because we believe that the adoption of the proposal would result in competitive devices, such as ours, losing some of the functionalities that they currently offer consumers. This would make them less attractive and consumers would have less of an incentive to purchase our products and services. The FCC was scheduled to vote at its September 29, 2016 meeting on proposed rules that would have included an app approach and required support for widely-deployed platforms (including the TiVo platform). The FCC subsequently removed these proposals from consideration following prior to the change in Presidential administrations. We cannot predict the impact of any new technical equipment regulations on our business and operations.
Certain cable operators are deploying switched digital video technologies to transmit television programs in an on demand fashion (switched digital) only to subscribers who request to watch a particular program. Although cable operators are deploying a solution to enable our retail products to receive channels delivered with switched technologies (known as the “Tuning Adapter”), if this technology is not successful or is not accepted by our customers (due to cost, complexity, functionality, or other reasons), then the increased use of switched technologies and the continued inability of our products to receive switched cable programming without a Tuning Adapter may reduce the desirability and competitiveness of our products and services and adversely affect sales of our TiVo-Owned subscriptions in which case our business would be harmed.
Similarly, if cable operators implement new technologies in the future to transmit television programming that do not allow programs to be received and displayed on our retail products, the desirability and competitiveness of our products and services will be adversely affected and impact the sales of our TiVo-Owned products and services, in which case our business would be harmed.
We have limited control over existing and potential customers' and licensees' decisions to include our technology in their product and service offerings.
In general, we are dependent on our customers and licensees to incorporate our technology into their products and services. Although we have license agreements with many of these companies, many of these license agreements do not require any minimum purchase commitments, or are on a non-exclusive basis, or do not require incorporation of our technology in their products and services. If our customers were to determine that the benefits of our technology do not justify the cost of licensing the technology, then demand for our technology would decline. Furthermore, while we may be successful in having one or more industry standards-setting organizations require that our technology be used in order for a product to be compliant with the standards promulgated by such organizations, there is no guarantee that products associated with these standards will be successful in the market. Our licensees and other manufacturers might not utilize our technology in the future. If this were to occur, our business would be harmed.
If we fail to adequately manage our increasingly complex distribution agreements, including licensing, development, and engineering services, we could be subjected to unexpected delays in the deployment of TiVo's advanced television solutions, increased costs, possible penalties and adverse accounting and contractual consequences, including termination of such distribution arrangements. In any such event, our business would be harmed.
In connection with our deployment arrangements for TiVo, we engage in complex licensing, development, and engineering services arrangements with our marketing partners and distributors. These deployment agreements with television service providers usually provide for some or all of the following deliverables: software engineering services, solution integration services, hosting of the TiVo service, maintenance, and support. In general, these contracts are long-term and complex and often rely on the timely performance of such television service provider's third-party vendors that are outside TiVo's control. The engineering services and technology we agree to provide and/or develop may be essential to the functionality of the licensed software and delivered product or such software may involve significant customization and modification for each customer. We have experienced or may experience delays in delivery with television service providers including, for example, Com Hem and Virgin, as well as significant increases in expected costs of development and performance in certain instances in the past. Additional delays could lead to additional costs and adverse accounting treatments forcing us to recognize costs earlier than expected. If we are unable to deliver the contracted for technology, including specified customizations and modifications, and services in a timely manner or at all, then we could face penalties in the form of unreimbursed engineering development work, loss of subscriber or minimum financial commitments on the part of our partners or in extreme cases the early termination of such distribution agreements. In any such case our business would be harmed.
In addition, when we enter into such deployment agreements with television service providers, we are typically required to make cost estimates based on historical experience and various other assumptions. These estimates are assessed continually during the term of the contract and revisions are reflected when the conditions become known. Using different cost estimates related to engineering services may produce materially different operating results, in addition to differences in timing and income statement classification of related expenses and revenues. An unfavorable change in estimates could result in a reduction of profit due to higher cost or the recording of a loss once such a loss becomes known to us that would be borne solely by us. We also recognize revenues for 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. If we are unable to properly measure and estimate our progress toward completion in such circumstances, we could incur unexpected additional costs, be required to recognize certain costs earlier than expected, or otherwise be required to delay recognition of revenues unexpectedly. A material inability to properly manage, estimate, and perform these development and engineering services for our television service provider customers could cause us to incur unexpected losses and reduce or even eliminate any profit from these arrangements, and in such a case our business would be harmed.
The nature of some of our business relationships may restrict our ability to operate freely in the future.
From time to time, we have engaged and may engage in the future in discussions with other parties concerning business relationships, which have included and may in the future include exclusivity provisions (such as geographic or product specific limitations), most favored customer limitations, and patent licensing arrangements. While we believe that such business
relationships have historically enhanced our ability to finance and develop our business model or otherwise were justified by the terms of the particular relationship, the terms and conditions of such business relationships may place some restrictions on the operation of our business, including where we operate, who we work with, and what kinds of activities we may engage in, in the future.
We face significant risks in overseeing our outsourcing of manufacturing processes as well as in the management of our inventory, and failure to properly oversee our manufacturing processes or to effectively manage our inventory levels may result in product recalls or supply imbalances that could harm our business.
We have contracted for the manufacture of certain TiVo-enabled DVRs and non-DVR products with a contract manufacturer. We sell these units to retailers and distributors, as well as through our own online sales channels. Product manufacturing is outside our core business and we face significant risks if our contract manufacturer does not perform as expected. If we fail to effectively oversee the manufacturing process, including the work performed by our contract manufacturer, we could suffer from product recalls, poorly performing product, and higher than anticipated warranty costs.
In connection with our manufacturing operations, we maintain a finished goods inventory of the DVR and non-DVR units we produce throughout the year. Due to the seasonality in our business and our long-lead time product development and manufacturing cycles, we need to make forecasts of demand and commit significant resources towards manufacturing of our DVR and non-DVR units well in advance of our peak selling periods. We also have risks with respect to changing hardware forecasts with our television service provider partners who may revise their purchase forecasts lower or higher after we have committed manufacturing resources to meeting such forecasts due to long-lead times and prior to the time in which such television service provider forecasts become contractually binding. As such, we are subject to significant risks in managing the inventory needs of our business during the year, including estimates of the appropriate mix of demand across our older and newer DVR and non-DVR models. If we were to overestimate demand for our products, we may end up with inventories that exceed currently forecasted demand which would require us to record additional write-downs. If we were to underestimate demand for our products, we may end up with inventory shortages causing us to fail to meet actual customer demand. Should actual market conditions differ from our estimates, our future results of operations could be materially affected. In the future, we may be required to record write-downs of finished products and materials on-hand and/or additional charges for excess purchase commitments as a result of future changes in our sales forecasts.
We face significant risks to our business when we engage in the outsourcing of engineering work, including outsourcing of software work overseas, which, if not properly managed, could result in the loss of valuable intellectual property, increased costs due to inefficient and poor work product, and subject us to export control restrictions which could impede or prevent us from working with partners internationally, which could harm our business, including our financial results, reputation, and brand.
We have from time-to-time outsourced engineering work related to the design and development of the software in our products, typically to save money and gain access to additional engineering resources. We have worked, and expect to in the future work, with companies located in jurisdictions outside of the United States, including, but not limited to, Romania, India, Ukraine, and the United Kingdom. We have limited experience in the outsourcing of engineering and software development to third-parties located internationally that operate under different laws and regulations than those in the United States. If we are unable to properly manage and oversee the outsourcing of this engineering and other work related to our products, we could suffer the loss of valuable intellectual property, or the loss of the ability to claim such intellectual property, including patents, trademarks, trade secrets, and copyrights. We could also be subjected to increased regulatory and other scrutiny related to export control restrictions which could impede or prevent us from working with international partners. Additionally, instead of saving money, we could in fact incur significant additional costs as a result of inefficient or delayed engineering services or poor work product. As a result, our business would be harmed, including our financial results, reputation, and brand.
The markets for our advertising platform may not develop and we may fail in our ability to fully exploit these opportunities if these markets do not develop as we anticipate.
The market for interactive television advertising is at an early stage of development and we cannot assure you that we will succeed in our efforts to develop our advertising platform as a medium widely accepted by consumers and advertisers. In addition, pay TV operators who have a patent license from us are not required to provide advertising or utilize our technology, although some have. Therefore, our ability to derive advertising revenues from our patent licensees also depends on the implementation of compatible interactive advertising technologies by such licensees.
Consolidation of the telecommunications, cable and satellite broadcasting industry could adversely affect existing agreements.
We have entered into agreements with a large number of pay TV operators for the licensing or distribution of our technology, products and services. If consolidation of the telecommunications, cable and satellite broadcasting industry continues, some of these agreements may be affected by mergers, acquisitions or system swaps which could result in an adverse effect on the amount of revenue we receive under these types of agreements.
A significant portion of our revenue is derived from international sales. Economic, political, regulatory and other risks associated with our international business or failure to manage our global operations effectively could have an adverse effect on our operating results.
As of December 31, 2016, we had three major locations (defined as a location with more than 50 employees) and employed approximately 480 employees outside the U.S. We face challenges inherent in efficiently managing employees over large geographic distances and across multiple office locations, including the need to implement appropriate systems, controls, policies, benefits and compliance programs. Our inability to successfully manage our global organization could have a material adverse effect on our business and results of operations.
We expect that international and export sales will continue to represent a substantial portion of our revenues for the foreseeable future. Our future growth will depend to a large extent on worldwide acceptance and deployment of our solutions.
To the extent that foreign governments impose restrictions on importation of programming, technology or components from the U.S., the demand for our solutions in these markets could diminish. In addition, the laws of some foreign countries may not protect our IP rights to the same extent as do the laws of the U.S., which increases the risk of unauthorized use of our technologies. Such laws also may not be conducive to copyright protection of digital content, which may make our content protection technology less effective and reduce the demand for it.
Because we sell our products and services worldwide, our business is subject to the risks associated with conducting business internationally, including:
Our business could be materially adversely affected if foreign markets do not continue to develop, if we do not receive additional orders to supply our technologies, products or services for use by foreign pay TV operators, CE and set-top box manufacturers, PPV/VOD providers and others or if regulations governing our international businesses change. Any changes to the statutes or the regulations with respect to export of encryption technologies could require us to redesign our products or technologies or prevent us from selling our products and licensing our technologies internationally.
We face risks with respect to conducting business in China due to China's historically limited recognition and enforcement of intellectual property and contractual rights and because of certain political, economic and social uncertainties relating to China.
We have direct license relationships with many consumer hardware device manufacturers located in China and a number of the electronics companies that license our technologies utilize captive or third-party manufacturing facilities located in China. We expect consumer hardware device manufacturing in China to continue to increase due to its lower manufacturing cost structure as compared to other industrialized countries. As a result, we face additional risks in China, in large part due to
China's historically limited recognition and enforcement of contractual and IP rights. In particular, we have experienced, and expect to continue to experience, problems with China-based consumer hardware device manufacturers underreporting or failing to report shipments of their products that incorporate our technologies, or incorporating our technologies or trademarks into their products without our authorization or without paying us licensing fees. We may also experience difficulty enforcing our IP rights in China, where IP rights are not as respected as they are in the U.S., Japan and Europe. Unauthorized use of our technologies and IP rights by China-based consumer hardware device manufacturers may dilute or undermine the strength of our brands. If we cannot adequately monitor the use of our technologies by China-based consumer hardware device manufacturers, or enforce our IP rights in China, our revenue could be adversely affected.
Our systems and networks are subject to security and stability risks that could harm our business and reputation and expose us to litigation or liability.
Online business activities depend on the ability to store and transmit confidential information and licensed IP securely on our systems, third party systems and over private, hybrid and public networks. Any compromise of our ability to store or transmit such information and data securely or reliably, and any costs associated with preventing or eliminating such problems, could harm our business. Storage and online transmissions are subject to a number of security and stability risks, including:
The occurrence of any of these or similar events could damage our business, hurt our ability to distribute products and services and collect revenue, threaten the proprietary or confidential nature of our technology, harm our reputation, and expose us to litigation or liability. Because some of our technologies and businesses are intended to inhibit use of or restrict access to our customers' IP, we may become the target of hackers or other persons whose use of or access to our customers' IP is affected by our technologies. Also, hackers may, for financial gain or other motives, seek to infiltrate or damage our systems, or obtain sensitive business information or customer information. We also may be exposed to customer claims, or other liability, in connection with any security breach or inadvertent disclosure. We may be required to expend significant capital or other resources to protect against the threat of security breaches, hacker attacks or system malfunctions or to alleviate problems caused by such breaches, attacks or failures.
Our product and service offerings rely on a variety of systems, networks and databases, many of which are maintained by us at our data centers or third party data centers. We do not have complete redundancy for all of our systems, and we do not maintain real-time back-up of our data, so in the event of significant system disruption, particularly during peak periods, we could experience loss of data processing capabilities, which could cause us to lose customers and could harm our operating results. Notwithstanding our efforts to protect against “down time” for products and services, we do occasionally experience unplanned outages or technical difficulties. In order to provide products and services, we must protect the security of our systems, networks, databases and software.
We need to safeguard the security and privacy of our customers’ confidential data and remain in compliance with laws that govern such data, and any inability to do so may harm our reputation and brand and expose us to legal action.
Our products and services and back-end information technology systems can collect and allow us to store individual viewer and account preferences and other data our customers may consider confidential. To provide better consumer experiences and to operate effectively, and for our analytics business and other businesses, we collect certain information from users. Collection and use of such information may be subject to U.S. federal and state privacy and data collection laws and regulations, standards used by credit card companies applicable to merchants processing credit card details, and foreign laws such as the European Union's Data Protection Directive (which may be added to or amended by the proposed General Data Protection Regulation or other regulations in the future). We may also be subject to third party privacy policies and permissions
In addition, the Children's Online Privacy Protection Act imposes civil and criminal penalties on persons collecting personal information from children under the age of 13. We do not knowingly distribute harmful materials to minors, direct our websites or services to children under the age of 13, or collect personal information from children under the age of 13. However, we are not able to control the ways in which consumers use our technology, and our technology may be used for purposes that violate this or other similar laws. The manner in which such laws may be interpreted and enforced cannot be fully determined, and future legislation could subject us to liability if we were deemed to be non-compliant.
Further, if our technological security measures are compromised, our customers may curtail or stop use of our products and services. Our products and services such as DVRs may contain the private information of our customers, and security breaches could expose us to a risk of loss of this information, which could result in potential liability and litigation. Like all services that connect with the Internet, our service, including our website, is vulnerable to break-ins, attacks, attempts to overload our servers with denial-of-service or other attacks and similar disruptions from unauthorized use of our computer systems, any of which could lead to interruptions, delays, or shutdowns of our service, causing loss of critical data or the unauthorized disclosure or use of personally identifiable or other confidential information. If we experience compromises to our security that result in service and website performance or availability problems, the complete shutdown of our service or website, or the loss or unauthorized disclosure of confidential information, our customers may lose trust and confidence in us, and decrease or discontinue their use of our service. Further, outside parties may attempt to fraudulently induce employees to disclose sensitive information in order to gain access to our information or our customers' information. It is also possible that one of our employees could gain access to our information or our customer's information and use it in violation of our internal policies and procedures. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and often are not recognized until launched against a target, we may be unable to proactively address these techniques or to implement adequate preventative measures from either external or internal threats. We may be required to make significant expenditures to protect against security breaches or to remedy problems caused by any breaches. Additionally, the laws governing such data are constantly changing and evolving and we must comply with these laws or our business, including our reputation, brand and financial results will be harmed. Failure to protect our information and our customer's information from external or internal threats could negatively impact our ability to attract new customers, cause existing customers to cancel their subscriptions, cause commercial partners to cease doing business with us, subject us to third-party lawsuits, regulatory fines or other actions or liabilities, thereby harming our business and operating results.
We and the third-party vendors we work with will need to remain compliant with the Payment Card Industry requirements for security and protection of customer credit card information and an inability to do so by us or our third-party vendors will adversely affect our business.
As a merchant who processes credit card payments from its customers, we are required to comply with the payment card industry requirements imposed on us for the protection and security of our customers' credit card information. If we are unable to successfully remain compliant with the payment card industry requirements imposed on us as a credit card merchant, our business would be harmed because we could be prevented in the future from transacting customer subscription payments by means of a credit card.
Risks Related to the Ownership of Our Common Stock
Our revenue levels or rate of revenue growth on a quarterly or annual basis may fluctuate, which may cause us to not be able to sustain our operating results, which may cause our common stock price to decline.
Our revenues, expenses and operating results could vary significantly in the future and period-to-period comparisons should not be relied on as indications of future performance. We may not be able to sustain our revenue levels, or our rate of revenue growth, on a quarterly or annual basis. In addition, we may be required to delay or extend recognition of revenue on more complex licensing arrangements as required under generally accepted accounting principles in the U.S. Fluctuations in our operating results have in the past caused, and may in the future cause, the price of our common stock to decline.
Other factors that could affect our operating results include:
Our operating results may also fluctuate depending on when we receive royalty reports from certain licensees. We recognize a portion of our license revenue only after we receive royalty reports from our licensees regarding the manufacture of their products that incorporate our technologies. As a result, the timing of our revenue is dependent on the timing of our receipt of those reports, some of which are not delivered until late in the reporting period or after the end of the reporting period. In addition, it is not uncommon for royalty reports to include corrective or retroactive royalties that cover extended periods of time. Furthermore, there have been times in the past when we have deferred an unusually large amount of licensing revenue from a licensee in a given reporting period because not all of the revenue recognition criteria were met. The subsequent satisfaction of the revenue recognition criteria can result in a large amount of licensing revenue from a licensee being recorded in a given reporting period that is not necessarily indicative of the amounts of licensing revenue to be received from that licensee in future reporting periods, thus causing fluctuations in our operating results.
Seasonal trends may cause our quarterly operating results to fluctuate and our inability to forecast these trends may adversely affect the market price of our common stock.
Consumer electronic product sales have traditionally been much higher during the holiday shopping season than during other times of the year. Although predicting consumer demand for our products is very difficult, we have experienced that sales of DVRs and other retail products and new subscriptions to the TiVo service have been higher during the holiday shopping season when compared to other times of the year. If we are unable to accurately forecast and respond to consumer demand for our products, our reputation and brand will suffer and the market price of our common stock would likely fall.
The price of our common stock may be volatile.
The market price of our common stock has been, and in the future could be, significantly affected by factors such as:
Announcements by satellite television operators, cable television operators, major content providers or others regarding CE business or pay TV operator combinations, evolving industry standards, consumer rights activists' “wins” in government regulations or the courts, motion picture production or distribution or other developments could cause the market price of our common stock to fluctuate.
There can be no assurance that our historic trading prices, or those of technology companies in general, will be sustained. In the past, following periods of volatility in the market price of a company's securities, some companies have been named in class action suits.
Further, economic uncertainty may adversely affect the global financial markets, which could cause the market price of our common stock to fluctuate.
Our Certificate of Incorporation, Bylaws and Delaware law could discourage a third-party from acquiring us and consequently decrease the market value of our common stock.
In the future, we could become the subject of an unsolicited attempted takeover of our Company. Although an unsolicited takeover could be in the best interests of our stockholders, certain provisions of Delaware law and our organizational documents could be impediments to such a takeover. We are subject to the provisions of Section 203 of the Delaware General Corporation Law, an anti-takeover law. In general, the statute prohibits a publicly held Delaware corporation from engaging in a business combination with an interested stockholder for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. As discussed above, our certificate of incorporation was amended and restated to include stock transfer restrictions applicable to 5% or greater stockholders. Our amended and restated certificate of incorporation and amended and restated bylaws also require that any action required or permitted to be taken by our stockholders must be effected at a duly called annual or special meeting of the stockholders and may not be effected by a consent in writing. In addition, special meetings of our stockholders may be called only by a majority of the total number of authorized directors, the chairman of the board, our president or the holders of 20% or more of our common stock. These provisions of Delaware law, our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws could make it more difficult for us to be acquired by another company, even if our acquisition is in the best interests of our stockholders. Any delay or prevention of a change of control or change in management could cause the market price of our common stock to decline.
Legal and Regulatory Risks
Changes in, or interpretations of, tax rules and regulations, may adversely affect our effective tax rates.
We are subject to U.S. federal and state income taxes, as well as foreign income taxes. Our future effective tax rates could be unfavorably affected by changes in tax rates, tax laws or the interpretation of tax laws, by changes in the amount of pre-tax income derived from countries with high statutory income tax rates, or by changes in our deferred tax assets and liabilities, including changes in our ability to realize our deferred tax assets. Our effective income tax rate could be unfavorably affected by changes in the amount of sales to customers in countries with high withholding tax rates.
In addition, U.S. federal, U.S. state, and foreign tax jurisdictions may examine our income tax returns, including income tax returns of acquired companies and acquired tax attributes included therein. We regularly assess the likelihood of outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. In making such assessments, we exercise judgment in estimating our provision for income taxes. While we believe our estimates are reasonable, we cannot assure you that the final determination from these examinations will not be materially different from that reflected in our historical income tax provisions and accruals. Any adverse outcome from these examinations may have a material adverse effect on our business and operating results.
We may make patent assertions, or initiate patent infringement or patent interference actions or other litigation to protect our IP, which could be costly and harm our business.
We are currently engaged in litigation, and litigation may be necessary in the future, to enforce our patents and other IP rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. For example, we have initiated patent infringement litigation against Comcast and expect to incur significant expenses in connection with this patent infringement case. If we are unable to reach favorable license terms with Comcast or otherwise experience an adverse outcome in patent infringement lawsuits, our revenues could be adversely impacted and our ability to license our intellectual property on favorable terms to other third parties in the future, each of which would harm our business.
We, and many of our current and potential competitors, dedicate substantial resources to protection and enforcement of IP rights. We believe that companies will continue to take steps to protect their technologies, including, but not limited to, seeking patent protection. Companies in the technology and content-related industries have frequently resorted to litigation regarding IP rights. Disputes regarding the ownership of technologies and their associated rights are likely to arise in the future and we may be forced to litigate to determine the validity and scope of other parties' proprietary rights. Any such litigation is
inherently risky, the outcome is uncertain, could be costly, could distract our management from focusing on operating our business, could delay recognition of revenue until a settlement or decision is ultimately reached, could result in the invalidation or adverse claims construction of patents, and might ultimately be unsuccessful. The existence and/or outcome of such litigation could harm our business.
In 2014, the Supreme Court of the United States decided the Alice Corp v. CSL Bank International ("Alice") case. The Alice case generally addresses patentable subject matter, and specifically an exception to patentable subject matter for "abstract ideas." In the Alice case, the court provides some general interpretive guidance to be considered when determining whether patent claims are directed to patent-ineligible abstract ideas, along with a two-step test for determining patentable subject matter eligibility going-forward. Practically, the effects of the Alice decision are still being assessed by patent holders, attorneys, the United States Patent & Trademark Office and various courts, all of which are attempting to determine the appropriate analysis and boundaries of the Alice decision on other patents. In any event, the Alice decision will provide potential licensees and accused infringers of certain patents - including our patents - new arguments to challenge the validity of such patents, which could cause some delays or risk in pending or future patent negotiations or litigation.
Additionally, the relationships with our customers, suppliers and technology collaborators may be disrupted or terminated as a result of patent assertions that we may make against them, which could harm our business.
Finally, adverse legal rulings could result in the invalidation of our patents, the narrowing of the claims of our patents, or fostering of the perception by licensees or potential licensees that a judicial finding of their infringement is unlikely. Such results or perceptions could decrease the likelihood that licensees or potential licensees may be interested in licensing our patents, or could decrease the amounts of license fees that they are willing to pay, which could harm our business.
We may be subject to IP infringement claims or other litigation, which are costly to defend and could limit our ability to use certain technologies, result in the loss of significant rights, require us to alter our current product and business strategy and force us to cease operating our business, in which case our business would be harmed.
From time to time we receive claims and inquiries from third parties alleging that our internally developed technology, technology we have acquired or technology we license from third parties may infringe other third parties' proprietary rights (especially patents). Third parties have also asserted and most likely will continue to assert claims against us alleging infringement of copyrights, trademark rights or other proprietary rights relating to video or music content, or alleging unfair competition or violations of privacy rights. We have faced such claims in the past, we currently face such claims, and we expect to face similar claims in the future. Regardless of the merits of such claims, any disputes with third parties over IP rights could materially and adversely impact our business, including by resulting in the diversion of management time and attention from our core business, the significant cost to defend ourselves against such claims or reducing the willingness of licensees to incorporate our technologies into their products or services. For example, many patents covering interactive television technologies have been granted but have not been commercialized. A number of companies in the advanced-television industry earn substantial profits from technology licensing, and the introduction of new technologies by us is likely to provoke lawsuits from such companies. A successful claim of infringement against us, our inability to obtain an acceptable license from the holder of the patent or other right, or our inability to design around an asserted patent or other right could cause our manufacturers to cease manufacturing products that incorporate our technologies, including devices that enable the TiVo service, our retailers to stop selling our products or us to cease providing our service, or all of the above, which would eliminate our ability to generate revenues.
Additionally, we have been asked by content owners to stop the display or hosting of copyrighted materials by our users or ourselves through our service offerings, including notices provided to us pursuant to the DMCA. We have and will promptly respond to legitimate takedown notices or complaints, including but not limited to those submitted pursuant to the DMCA, notifying us that we are providing unauthorized access to copyrighted content by removing such content and/or any links to such content from our services or products. Nevertheless, we cannot guarantee that our prompt removal of content, including removal pursuant to the provisions of the DMCA, will prevent disputes with content owners, that infringing content will not exist on our services, or that we will be able to resolve any disputes that may arise with content providers or users regarding such infringing content.
If any of these claims were to prevail, we could be forced to pay damages, comply with injunctions, or stop distributing our products or providing our services while we re-engineer them or seek licenses to necessary technology, which might not be available on reasonable terms or at all. We could also be subject to indemnification claims resulting from open source software violations or from infringement claims made against our customers, other companies with whom we have relationships or the current owners of businesses that we divested. Such indemnification claims could increase our defense costs and potential damages, in addition to forcing the Company to incur material additional expenses. For example, we have
received notices and lawsuits from certain customers requesting indemnification in patent-related lawsuits. We evaluate the requests and assess whether we believe we are obligated to provide such indemnification to such customers on a case-by-case basis. Customers or other companies making such requests could become unwilling or hesitant to do business with us if we decline such requests. An adverse determination with respect to such requests or in any of these events described above could require us to change our business practices and have a material impact on our business and results of operations. Furthermore, these types of disputes can be asserted by our licensees or prospective licensees or by other third parties as part of negotiations with us or in private actions seeking monetary damages or injunctive relief. Any disputes with our licensees or potential licensees or other third parties could harm our reputation and expose us to additional costs and other liabilities.
Litigation could harm our business and result in:
We are involved in the business of powering the discovery and enjoyment of digital entertainment, including over the internet. There has been, and we believe that there will continue to be, an increasing level of litigation to determine the applicability of current laws to, and impact of new technologies on, the use and distribution of content over the internet and through new devices. As we develop products and services that protect, provide or enable the provision of content in such ways, the risk of litigation against us may increase.
We may be subject to legal liability for the provision of third-party products, services, content or advertising.
Entertainment companies and other content owners may claim that some of the features of our TiVo DVRs or other products, such as our advertising products and features, and services violate copyright or trademark laws, which could force us to incur significant costs in defending such actions and affect our ability to market the TiVo service and the products that enable the TiVo service.
Although we have not been the subject of such actions to date, a past competitor's DVRs were the subject of several copyright infringement lawsuits by a number of major entertainment companies, including major television networks. These lawsuits alleged that the competitor's DVRs violate copyright laws by allowing users to skip commercials, delete recordings only when instructed and use the Internet to send recorded materials to other users. TiVo-enabled DVRs have some similar features, including the ability to fast-forward as well as skip (in certain newer models) through commercials, the ability to speed up the play back of recordings (in certain newer models), the ability to delete recordings only when instructed and the ability to
transfer recordings from a TiVo-enabled DVR to a personal computer and/or portable media devices. Based on market or consumer pressures, we may decide in the future to add additional features that may be objectionable to entertainment companies. If similar actions are filed against us based on current or future features of our DVRs and non-DVR products, entertainment companies may seek injunctions to prevent us from including these features and/or damages. Such litigation can be costly, even if we prevail in the litigation, and may divert the efforts of our management. Furthermore, if we were ordered to remove features from our DVRs or other products and services, we may experience increased difficulty in marketing the TiVo service and related TiVo products and services and may suffer reduced revenues as a result.
New governmental regulations or new interpretation of existing laws, including legislative initiatives seeking to, or judicial or regulatory decisions that, weaken patent protection or copyright law, could cause legal uncertainties and result in harm to our business.
The standards that courts use to interpret patents are not always applied predictably or uniformly and may evolve, particularly as new technologies develop. For example, the Supreme Court of the United States has modified some legal standards applied by the U.S. Patent and Trademark Office in examination of U.S. patent applications, which may decrease the likelihood that we will be able to obtain patents and may increase the likelihood of challenges to patents we obtain or license. Additionally, the Leahy-Smith America Invents Act (the "Leahy-Smith Act") includes a number of significant changes to the U.S. patent laws, such as, among other things, changing from a "first to invent" to a "first inventor to file" system, establishing new procedures for challenging patents and establishing different methods for invalidating patents. The U.S. Patent and Trademark Office is still in the process of implementing regulations relating to these changes, and the courts have yet to address many of the new provisions of the Leahy-Smith Act. Some of these changes or potential changes may not be advantageous to the Company, and it may become more difficult to obtain adequate patent protection or to enforce the Company's patents against third parties. While the Company cannot predict the impact of the Leahy-Smith Act at this time, these changes or potential changes could increase the costs and uncertainties surrounding the prosecution of the Company's patent applications and adversely affect the Company's ability to protect its IP.
Consumer rights advocates and other constituencies also continuously challenge copyright law, notably the DMCA, through both legislative and judicial actions. Legal uncertainties surrounding the application of the DMCA may adversely affect our business. If copyright law is compromised, or devices that can circumvent our technology are permitted by law and become prevalent, this could result in reduced demand for our technologies, and our business would be harmed.
Many laws and regulations are pending and may be adopted in the U.S., individual states and local jurisdictions and other countries with respect to the internet. These laws may relate to many areas that impact our business, including IP rights, digital rights management, copyright, property ownership, privacy, taxation, and the consumer electronics and television industry. These types of regulations are likely to differ between countries and other political and geographic divisions. Other countries and political organizations are likely to impose or favor more and different regulation than that which has been proposed in the U.S., thus furthering the complexity of regulations. In addition, state and local governments may impose regulations in addition to, inconsistent with, or stricter than federal regulations. Changes to or the interpretation of these laws could increase our costs, expose us to increased litigation risk, substantial defense costs and other liabilities or require us or our customers to change business practices. It is not possible to predict whether or when such legislation may be adopted, and the adoption of such laws or regulations and uncertainties associated with their validity, interpretation, applicability and enforcement, could materially and adversely affect our business. For example, legislation regarding customer privacy or copyright could be enacted or expanded in ways that apply to the TiVo service, which could adversely affect our business. Laws or regulations could be interpreted to prevent or limit access to some or all television signals by certain consumer electronics devices, or impose limits on the number of copies, the ability to transfer or move copies, or the length of time a consumer may retain copies of some or all types of television programming. New or existing copyright laws could be applied to restrict the capture of television programming, which would adversely affect our business. It is unknown whether existing laws and regulations will apply to the digital video recorder market.
In addition, the satellite transmission, cable and telecommunications industries are subject to pervasive federal regulation, including FCC licensing and other requirements, as well as extensive regulation by local and state authorities. The FCC could promulgate new regulations or interpret existing regulations in a manner that would cause us to incur significant compliance costs or force us to alter or eliminate certain features or functionality of our products or services, which may adversely affect our business. For example, the FCC could determine that certain of our products fail to comply with regulations concerning matters such as electrical interference, copy protection, digital tuners, or display of television programming based on rating systems. The FCC could also impose limits on the number of copies, the ability to transfer or move copies, the length of time a consumer may retain copies, or the ability to access some or all types of television programming. Furthermore, FCC regulations may affect cable television providers and other multi-channel video programming distributors ("MVPDs"), which are the primary customers for certain of our products and services. Although federal law no
longer prohibits MVPDs (except DBS providers) from deploying navigation devices (e.g., set-top boxes) with combined security and non-security functions (the “integration ban”), further developments with respect to these issues or other related FCC action could impact the availability and/or demand for “plug and play” devices, including set-top boxes, all of which could affect demand for IPGs incorporated in set-top boxes or CE devices and correspondingly affect our license fees; moreover, new regulations, or new interpretations of existing regulations, could reduce the desirability of our products and services, require us to make changes to our products or services, or increase our compliance costs.
We have also requested, and received, a waiver from the FCC that defers our requirement to incorporate an industry standard, interactive and recordable home network interface in the devices that we provide to cable operators. Our waiver currently expires on December 31, 2018.
It is difficult to anticipate the impact of current or future laws and regulations on our business. We may have significant expenses associated with staying appraised of and in compliance with local, state, federal, and international legislation and regulation of our business and in presenting the Company’s positions on proposed laws and regulations.
We advertise, market, and sell our services directly to consumers; many of these activities are highly regulated by constantly evolving state and federal laws and regulations and violations of these laws and regulations could harm our business.
We engage in various advertising, marketing, and other promotional activities. For instance, in the past, we have offered gift subscriptions and mail-in-rebates to consumers, which are subject to state and federal laws and regulations. A constantly evolving network of state and federal laws is increasingly regulating these promotional activities. Additionally, we enter into subscription service contracts directly with consumers which govern both our provision of and the consumers' payment for the TiVo service. For example, consumers who activate new monthly subscriptions to the TiVo service may be required to commit to pay for the TiVo service for a minimum of one year or be subject to an early termination fee if they terminate prior to the expiration of their commitment period. If the terms of our subscription service contracts with consumers, such as our imposition of an early termination fee, or our previously offered rebate or gift subscription programs were to violate state or federal laws or regulations, we could be subject to suit, penalties, and/or negative publicity in which case our business would be harmed.
Legislation, laws or regulations relating to environmental issues, including conflict minerals, may adversely impact our business in the future.
It is possible that future proposed environmental regulations on consumer electronic devices, such as DVRs and set-top boxes, may regulate and increase the production, manufacture, use, and disposal costs incurred by us and our customers. For example, the Energy Independence and Security Act of 2007 directs the Department of Energy to prescribe labeling or other disclosure requirements for the energy use of standalone digital video recorder boxes. This and future energy regulations could potentially make it more costly for us to design, manufacture, and sell certain products to our customers thus harming the growth of our business.
Additionally, under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the “Dodd-Frank Act,” the SEC adopted new requirements for companies that use certain minerals and metals, known as conflict minerals, in their products, whether or not these products are manufactured by third-parties. These requirements mandate that companies perform due diligence, disclose and report whether or not such minerals originate from the Democratic Republic of Congo and adjoining countries. These new requirements could adversely affect the sourcing, availability, and pricing of minerals used in the manufacture of certain of our products and the numerous components that go into certain of our products. For instance, a number of our key components in certain of our products are supplied from a single source, and finding alternatives components that would be conflict mineral free in some cases could be expensive and cause delays in our ability to manufacture those products and meet customer demand. In addition, we have and will incur additional costs to comply with the disclosure requirements, including costs related to determining the source of any of the relevant minerals and metals used in our products. Since our supply chain is complex, we may not be able to sufficiently verify the origins for these minerals and metals used in our products through our due diligence procedures, which may harm our reputation. In such event, we may also face difficulties in satisfying customers who require that all of the components of our products are certified as conflict mineral free. Therefore, regulations related to “conflict minerals” may force us to incur additional expenses, may make our supply chain more complex and may result in damage to our reputation with customers, which would harm our business.
Privacy concerns and laws, evolving regulation of television viewing behavior and cloud computing, cross-border data transfer restrictions and other domestic or foreign regulations may limit the use and adoption of our services and adversely affect our business.
Regulation related to the provision of services similar to those we provide through the Internet is increasing, as federal, state and foreign governments continue to adopt new laws and regulations addressing data privacy and the collection, processing, storage and use of personal information, including television viewing data. In some cases, foreign data privacy laws and regulations, such as the European Union’s Data Protection Directive, and the country-specific laws and regulations that implement that directive, also govern the processing of personal information. Further, laws are increasingly aimed at the use of personal information for marketing purposes, such as the European Union’s e-Privacy Directive, and the country-specific regulations that implement that directive and the new General Data Privacy Regulations which is due to come into force in 2018. Such laws and regulations are subject to new and differing interpretations and may be inconsistent among jurisdictions. These and other requirements could reduce demand for our services or restrict our ability to store and process data or, in some cases, impact our ability to offer our services in certain locations or our customers' ability to deploy our solutions globally and/or transfer data outside certain jurisdictions. The costs of compliance with and other burdens imposed by laws, regulations and standards may limit the use and adoption of our services, reduce overall demand for our services, lead to significant fines, penalties or liabilities for noncompliance, or slow the pace at which we sign new operator customers outside the U.S., any of which could harm our business.
We are subject to the Foreign Corrupt Practices Act (“FCPA”) and similar anti-corruption and anti-bribery laws in the U.S. and other jurisdictions, and our failure to comply with such laws and regulations thereunder could result in penalties which could harm our reputation, business, and financial condition.
We are subject to the FCPA, which generally prohibits companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or keeping business. The FCPA also requires companies to maintain adequate record-keeping and internal accounting practices to accurately reflect the transactions of the company. Under the FCPA, U.S. companies may be held liable for actions taken by their strategic or local partners or representatives. The FCPA and similar laws in other countries can impose civil and criminal penalties for violations.
If we do not properly implement practices and controls with respect to compliance with the FCPA and similar anti-corruption and anti-bribery laws in the U.S. and other jurisdictions, or if we fail to enforce those practices and controls properly, we may be subject to regulatory sanctions, including administrative costs related to governmental and internal investigations, civil and criminal penalties, injunctions and restrictions on our business activities, all of which could harm our reputation, business and financial condition.
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2. PROPERTIES
The following table lists our principal locations:
We believe that our existing facilities are adequate to meet current requirements and that additional or substitute space will be available as needed to accommodate any expansion of operations.
ITEM 3. LEGAL PROCEEDINGS
Information with respect to this item is contained in Note 10 to the Consolidated Financial Statements included in Part IV of this Annual Report on Form 10-K, which is incorporated by reference herein.
ITEM 4. MINE SAFETY DISCLOSURES
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information and Holders
The common stock of TiVo Corporation is listed on the NASDAQ Global Select Market under the symbol "TIVO". Prior to the TiVo Acquisition Date, Rovi's common stock was listed on the NASDAQ Global Select Market under the symbol "ROVI". The following table sets forth, for the periods indicated, the reported high and low intraday sales prices for the common stock of TiVo Corporation (and Rovi Corporation prior to the TiVo Acquisition Date):
As of December 31, 2016, the closing price of our common stock as reported on the NASDAQ Global Select Market was $20.90 per share. As of February 10, 2017 there were 988 holders of record of our common stock, based on information furnished by American Stock Transfer & Trust Company, the transfer agent for our securities. The number of beneficial stockholders is substantially greater than the number of holders of record as a large portion of our common stock is held through brokerage firms.
Stock Performance Graph*
The graph below shows a comparison of the cumulative total stockholder return of TiVo Corporation common stock (and Rovi Corporation's common stock prior to the TiVo Acquisition Date) with the cumulative total return of the NASDAQ Composite Index (the “Nasdaq”), the S&P 500 Composite Index (the “S&P 500”) and the Russell 2000 Index (“Russell 2000”) from December 31, 2011 through December 31, 2016. The graph assumes an initial investment of $100 in TiVo Corporation common stock and in each of the market indices on December 31, 2011, and further assumes the reinvestment of all dividends. The comparisons in the graph below are based on historical data and are not indicative of, or intended to forecast, future performance of TiVo Corporation common stock.
* The material in this section is not “soliciting material,” is not deemed filed with the SEC and is not to be incorporated by reference in any filing of TiVo Corporation under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date hereof and irrespective of any general incorporation language in such filing.
We have a disciplined capital allocation process that considers all alternatives for the use of our free cash flow, including dividends. While we have not paid any cash dividends in the last two years, on February 14, 2017, we declared a quarterly dividend of $0.18 per share, payable on March 15, 2017 to stockholders of record on March 1, 2017. Our cash dividend program and the payment of future cash dividends under the program are subject to continued capital availability and our Board of Directors' continuing determination that the dividend program and the declaration of dividends thereunder are in the best interests of our shareholders.
Our Senior Secured Credit Facility contains customary affirmative and negative covenants applicable to the Company and its subsidiaries, including, among other things, restrictions on dividends and other distributions. See Note 9 to the Consolidated Financial Statements in Part IV of this Annual Report on Form 10-K, which is incorporated by reference herein.
Recent Sales of Unregistered Securities
During the three months ended December 31, 2016 there were no sales of unregistered securities.
Issuer Purchases of Equity Securities
TiVo Corporation may choose to repurchase shares under its ongoing repurchase program when sufficient liquidity exists, the shares are trading at a discount relative to estimated intrinsic value and there are no alternative investment opportunities expected to generate a higher risk-adjusted return on investment.
The following table provides information about the Company's purchases of its common stock during the three months ended December 31, 2016 (in thousands, except per share amounts):
On February 14, 2017, TiVo Corporation's Board of Directors approved an increase to the stock repurchase program authorization to $150.0 million. The February 2017 authorization includes amounts which were outstanding under previously authorized share repurchase programs.
ITEM 6. SELECTED FINANCIAL DATA
The tables below set forth selected financial data (in millions, except per share amounts). The information is not necessarily indicative of results of future operations. The selected financial data is derived from, and should be read in conjunction with, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Part II, and the Consolidated Financial Statements and notes thereto included in Part IV, of this Annual Report on Form 10-K, which are incorporated by reference herein.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following commentary should be read in conjunction with the Consolidated Financial Statements and related notes contained in Part IV of this Annual Report on Form 10-K. This discussion contains forward-looking statements based on current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under Item 1A., "Risk Factors" included in Part I of this Annual Report on Form 10-K.
Executive Overview of Results
On September 7, 2016 (the "TiVo Acquisition Date"), Rovi Corporation ("Rovi") completed its acquisition of TiVo Inc. (renamed TiVo Solutions Inc. ("TiVo Solutions") on September 7, 2016), a global leader in next-generation video technology and innovative cloud-based software-as-a-service solutions, for $1.1 billion (the "TiVo Acquisition"). The TiVo Acquisition created a new company, TiVo Corporation ("TiVo" or the "Company"), which is a global leader in entertainment technology and audience insights. From the interactive program guide ("IPG") to the digital video recorder ("DVR"), we provide innovative products and licensable technologies that enable the world’s leading media and entertainment companies to deliver the ultimate entertainment experience and improve how people find content across a changing media landscape. For further details on the TiVo Acquisition, see Note 2 of the Consolidated Financial Statements included in Part IV of this Annual Report on Form 10-K, which is incorporated by reference herein.
Our operations are organized into two reportable segments for financial reporting purposes: Intellectual Property Licensing and Product. The Intellectual Property Licensing segment consists primarily of licensing our patent portfolio to multi-channel video service providers (e.g., cable, satellite and internet-protocol television), set-top box manufacturers, interactive television software and program guide providers in the online, over-the-top ("OTT") video and mobile phone businesses and consumer electronics (“CE”) manufacturers. Our broad portfolio of licensable technology patents covers many aspects of content discovery, DVR, video-on-demand (“VOD”), OTT experiences, multi-screen functionality and personalization, as well as interactive applications and advertising. We group our Intellectual Property Licensing revenues into two verticals; Service Provider and Consumer Electronics, based primarily on the business of our customer. The Product segment consists primarily of the licensing of Company-developed IPG products and services to multi-channel video service providers and CE manufacturers, in-guide advertising revenue, analytics revenue and revenue from licensing the TiVo service, licensing metadata and selling TiVo-enabled DVR and non-DVR products. We group our Product revenues into three verticals; Platform Solutions, Software and Services and Other, based on the products delivered to our customer. Platform Solutions includes revenue from licensing Company-developed IPG products and the TiVo service and selling TiVo-enabled DVR and non-DVR products. Software and Services includes revenue from licensing our metadata, advanced search and recommendation and analytics products, as well as in-guide advertising revenue. Other revenue includes sales of legacy Analog Content Protection ("ACP"), VCR Plus+, connected platform and media recognition products.
Total Revenues, net for the year ended December 31, 2016 increased by 23% compared to the prior year primarily as a result of the TiVo Acquisition, as including TiVo Solutions' results for the period increased revenue by $147.4 million, which includes revenue from a license agreement executed in the fourth quarter of 2016 with Samsung Electronics Co. ("Samsung") that included significant catch-up payments to make us whole for the pre-license period of use. Total Revenues, net also benefited from a new license agreement with DISH Network L.L.C. ("DISH") that included significant catch-up payments to make us whole for the pre-license period of use, partially offset by an IPG patent license agreement executed in the fourth quarter of 2015 that included significant catch-up payments to make us whole for the pre-license period of use, Comcast Corporation ("Comcast") being out of license during much of 2016 and a continued decline in ACP revenue.
Our Intellectual Property Licensing contract with Comcast expired on March 31, 2016. Our Product relationship with Comcast, primarily a metadata license, remains in effect. The expiration of our license with Comcast, as well as litigation initiated against Comcast, may result in a reduction of revenue and an increase in litigation costs. While the Company anticipates that Comcast will eventually execute a new license, the length of time that Comcast is out of license prior to executing a license is uncertain. The amount of revenue recognized in the reporting period a license is executed is uncertain and will depend on a variety of factors, including license terms such as duration, pricing, covered products and fields of use, and the duration of the out-of-license period. In addition, while litigation costs may increase, whether the litigation initiated against Comcast will cause total expenses to increase or decrease longer-term will be a function of several factors, including the length of time Comcast is out of license and the length of time we remain in litigation with Comcast.
For the year ended December 31, 2016, our income from continuing operations, net of tax was $37.2 million, or $0.40 per diluted share, compared to a loss from continuing operations, net of tax of $4.3 million, or $0.05 per diluted share, in the prior year. The improvement in results from continuing operations was primarily due to an $86.1 million benefit from a reduction in our deferred tax asset valuation allowance recognized in connection with the TiVo Acquisition and license agreements executed in the third and fourth quarters of 2016 with DISH and Samsung, respectively, both of which included significant catch-up payments to make us whole for the pre-license period of use. These year-over-year benefits were partially offset by $40.0 million of Transaction, transition and integration costs associated with the TiVo Acquisition and a $25.2 million increase in Restructuring and asset impairment charges. The results of operations include TiVo Solutions' results for the period subsequent to the TiVo Acquisition Date.
Comparison of Year Ended December 31, 2016 and 2015
The consolidated results of operations for the year ended December 31, 2016 compared to the prior year were as follows (dollars in thousands):
Total Revenues, net
For the year ended December 31, 2016, Total Revenues, net increased 23% compared to the prior year primarily as a result of the TiVo Acquisition, as including TiVo Solutions' results for the period increased revenue by $147.4 million, which includes revenue from a license agreement executed in the fourth quarter of 2016 with Samsung that included significant catch-up payments to make us whole for the pre-license period of use. Total Revenues, net also benefited from a new license agreement with DISH that included significant catch-up payments to make us whole for the pre-license period of use, partially
offset by an IPG patent license agreement executed in the fourth quarter of 2015 that included significant catch-up payments to make us whole for the pre-license period of use, Comcast being out of license during much of 2016 and a continued decline in ACP revenue.
At the segment level, Intellectual Property Licensing and Product revenues increased $65.6 million and $57.2 million, respectively, for the year ended December 31, 2016. Intellectual Property Licensing generated 53.5% and 53.6% of Total Revenues, net for the years ended December 31, 2016 and 2015, respectively. As a result of the TiVo Acquisition, we anticipate Product revenues will become a larger portion of our operations in 2017.
For additional details on the changes in Total Revenues, net, see the discussion of our segment results below.
Cost of licensing, services and software revenues, excluding depreciation and amortization of intangible assets
Cost of licensing, services and software revenues, excluding depreciation and amortization of intangible assets, consist primarily of employee-related costs, patent prosecution, maintenance and litigation costs and an allocation of overhead and facilities costs, as well as service center and other expenses related to providing the TiVo service.
For the year ended December 31, 2016, Cost of licensing, services and software revenues, excluding depreciation and amortization of intangible assets increased 36% compared to the prior year primarily as a result of the TiVo Acquisition, as including TiVo Solutions' results for the period increased costs by $27.8 million. Other than the effects of including TiVo Solutions in the results for the period, Cost of licensing, services and software revenues, excluding depreciation and amortization of intangible assets increased $9.4 million from the prior period due to a $12.4 million increase in patent litigation and maintenance costs which primarily resulted from the ongoing Comcast litigation and $10.4 million of Transaction, transition and integration costs associated with the TiVo Acquisition, which were partially offset by a decrease in compensation costs and cost saving initiatives resulting in lower facilities and infrastructure costs. Included in Transaction, transition and integration costs in 2016 is $10.0 million in expenses for additional guaranteed license payments related to the Company’s over-the-top licensing partnership with Intellectual Ventures. These payments were expensed in the fourth quarter of 2016 as the payments were triggered by the execution of a patent license agreement during the quarter and are not expected to be recoverable from the net direct revenue resulting from the patent license agreement and the related TiVo product partnership. This expense was included in Transaction, transition and integration costs as the patent license agreement was entered into as part of continuing, and broadening, the product relationship with TiVo.
Cost of hardware revenues, excluding depreciation and amortization of intangible assets
Cost of hardware revenues, excluding depreciation and amortization of intangible assets includes all product-related costs associated with TiVo-enabled DVRs and non-DVRs, including manufacturing costs, employee-related costs, warranty costs and order fulfillment costs, as well as certain licensing costs and an allocation of overhead and facilities costs. Hardware is sold primarily as a means to grow our Licensing, services and software revenues and, as a result, generating positive gross margins from hardware sales is not the primary goal of the hardware business. For the year ended December 31, 2016, the increase in Cost of hardware revenues, excluding depreciation and amortization of intangible assets was attributable to including TiVo Solutions results for the period.
Research and development
Research and development expenses are comprised primarily of employee-related costs, consulting costs and an allocation of overhead and facilities costs.
For the year ended December 31, 2016, Research and development expenses increased 25% compared to the prior year primarily as a result of the TiVo Acquisition, as including TiVo Solutions' results for the period increased costs by $30.4 million. Other than the effects of including TiVo Solutions in the results for the period, Research and development costs decreased $5.1 million as a result of a $5.4 million reduction in compensation costs and a $2.1 million reduction in consulting costs related to our metadata operations and legacy guide products due to prior cost saving initiatives, offset in part by Transaction, transition and integration costs associated with the TiVo Acquisition of $3.8 million.
Selling, general and administrative
Selling expenses are comprised primarily of employee-related costs, including travel costs, advertising costs and an allocation of overhead and facilities costs. General and administrative expenses are comprised primarily of employee-related costs, including travel costs, corporate accounting, consulting, legal and tax fees and an allocation of overhead and facilities costs.
The 24% increase in Selling, general and administrative expenses during the year ended December 31, 2016 was primarily due to the TiVo Acquisition as including TiVo Solutions' results for the period increased costs by $23.3 million. Other than the effects of including TiVo Solutions in the results for the period, Selling, general and administrative costs increased $14.3 million as a result of Transaction, transition and integration costs associated with the TiVo Acquisition of $25.8 million. The increase in Transaction, transition and integration costs was partially offset by the prior year including $4.3 million of expenses related to a contested proxy election, a decrease in consulting costs related to planning for license renewals with AT&T, Charter, Comcast and DISH in the prior year and a $2.5 million decrease in marketing spend in the current year. In addition, Selling, general and administrative expenses were reduced during the years ended December 31, 2016 and 2015 by $1.6 million from changes in the estimated Cubiware contingent consideration liability and by $0.9 million from changes in the estimated Veveo contingent consideration liability, respectively. Selling, general and administrative expenses during the year ended December 31, 2016 also include a $1.2 million final Veveo earn-out settlement.
We anticipate incurring material transition and integration-related costs, primarily consisting of employee-related costs and information systems investments in connection with integrating the operations of TiVo Solutions with the operations of Rovi through 2017.
Depreciation and Amortization of intangible assets
For the year ended December 31, 2016, Depreciation and Amortization of intangible assets increased from the prior year primarily due to the TiVo Acquisition. For the year ended December 31, 2016, the inclusion of TiVo Solutions increased Depreciation by $2.0 million and increased Amortization of intangible assets by $28.9 million.
Restructuring and asset impairment charges
TiVo Integration Restructuring Plan
Following completion of the TiVo Acquisition, integration plans were implemented which are intended to realize operational synergies between Rovi and TiVo Solutions (the "TiVo Integration Restructuring Plan"). We expect to eliminate duplicative positions resulting in severance costs and the termination of certain leases and other contracts as part of the integration plans. We expect to generate over $100 million in cost synergies from the TiVo Acquisition and expect to take actions that will ultimately produce over $65 million of these synergies within one year of the TiVo Acquisition Date. Costs incurred in connection with the TiVo Integration Restructuring Plan to date primarily relate to termination and transition agreements with former TiVo Solutions' senior executives and Rovi's former Chief Operating Officer. As a result of these actions, Restructuring and asset impairment charges of $24.9 million were recognized for the TiVo Integration Restructuring Plan in the year ended December 31, 2016.
We expect to incur material restructuring costs in connection with the TiVo Integration Restructuring Plan through 2017.
Legacy Rovi Plans
In the three months ended March 31, 2016, Rovi initiated certain facility rationalization activities, including relocating its corporate headquarters from Santa Clara, California to San Carlos, California and consolidating its Silicon Valley operations into a new corporate headquarters, and eliminating a number of positions associated with a reorganization of the sales force structure, downsizing the global services workforce and eliminating certain general and administrative positions. As a result of these actions, Restructuring and asset impairment charges of $2.4 million were recognized in the year ended December 31, 2016.
In conjunction with the disposition of the Rovi Entertainment Store, DivX and MainConcept businesses and the Company's narrowed business focus on discovery, in 2014 we conducted a review of our remaining product development, sales, data operations and general and administrative functions to identify potential cost efficiencies. As a result of this analysis,
we took cost reduction actions that resulted in Restructuring and asset impairment charges of $2.2 million in the year ended December 31, 2015. Amounts recognized in the year ended December 31, 2015 represent adjustments to the amounts originally recorded in connection with restructuring plans initiated in 2014.
For the year ended December 31, 2016, Interest expense decreased compared to the prior year primarily due to a decrease in average debt outstanding and a lower effective interest rate on the 2020 Convertible Notes compared to the 2040 Convertible Notes.
Interest income and other, net
For the year ended December 31, 2016, the increase in Interest income and other, net was primarily due to an increase in interest rates and higher average cash, cash equivalents and marketable securities.
Loss on interest rate swaps
We have not designated any of our interest rate swaps as hedges for accounting purposes and therefore changes in the fair value of our interest rate swaps are not offset by changes in the fair value of the related hedged item in our Consolidated Statements of Operations (see Note 9 to the Consolidated Financial Statements included in Item IV of this Annual Report on Form 10-K, which is incorporated by reference herein). We generally utilize interest rate swaps to convert the interest rate on a portion of our loans with a floating interest rate to a fixed interest rate. Under the terms of our interest rate swaps, we generally receive a floating rate of interest and pay a fixed rate of interest. When there is an increase in expected future London Interbank Offering Rate ("LIBOR"), we generally have gains when adjusting our interest rate swaps to fair value. When there is a decrease in expected future LIBOR, we generally have losses when adjusting our interest rate swaps to fair value.
Loss on debt extinguishment
During the year ended December 31, 2015, we made voluntary principal prepayments that extinguished Term Loan Facility A and elected to terminate our Revolving Facility. As a result of these actions, we recognized a Loss on debt extinguishment of $2.8 million.
Income tax (benefit) expense
Due to our significant net operating loss carryforwards and a valuation allowance applied against a significant portion of our deferred tax assets, foreign withholding taxes are the primary driver of our Income tax (benefit) expense.
During the year ended December 31, 2016, we recorded an income tax benefit of $86.1 million due to a change in our deferred tax asset valuation allowance resulting from the TiVo Acquisition. In connection with the TiVo Acquisition, a deferred tax liability was recorded for finite-lived intangible assets as described in Note 2 of the Consolidated Financial Statements included in Part IV of this Annual Report on Form 10-K, which is incorporated by reference herein. These deferred tax liabilities are considered a source of future taxable income which allowed TiVo Corporation to reduce its pre-acquisition deferred tax asset valuation allowance. The change in the pre-acquisition deferred tax asset valuation allowance is a transaction recognized separate from the business combination and reduces income tax expense in the period of the business combination. Other than the deferred tax asset valuation allowance release, Income tax (benefit) expense for the year ended December 31, 2016 primarily consists of $20.6 million of foreign withholding taxes.
Income tax (benefit) expense for the year ended December 31, 2015 primarily consists of $14.3 million of foreign withholding taxes, a $2.1 million increase in net deferred tax liabilities, $1.2 million of foreign income taxes and $0.7 million of state income taxes, which reflects the settlement of Rovi's 2008 California tax return, which were partially offset by a $4.5 million reduction in reserves for unrecognized tax benefits. On December 18, 2015, the Protecting Americans from Tax Hikes Act of 2015 was signed into law which, among other provisions, retroactively extended the U.S. federal research and development tax credit for the year ended December 31, 2015, resulting in the generation of a research and development tax credit of $1.3 million which was recognized in the fourth quarter of 2015. The research and development tax credit created a tax attribute to which we applied a full valuation allowance.
The year-over-year increase in foreign withholding taxes was due to an increase in license fees received in 2016 coming from licensees in countries subject to foreign withholding taxes.
Loss from discontinued operations, net of tax
The Loss from discontinued operations, net of tax for the year ended December 31, 2016 is due to a settlement with Dolby Laboratories, Inc. related to unpaid royalties from Rovi's Roxio, DivX and MainConcept businesses which were divested in prior periods. For additional information, see Note 10 of the Consolidated Financial Statements included in Part IV of this Annual Report on Form 10-K, which is incorporated by reference herein.
We report segment information in the same way management internally organizes the business for assessing performance and making decisions regarding the allocation of resources to the business units. The terms Adjusted Operating Expenses and Adjusted EBITDA in the following discussion use the definitions provided in Note 14 of the Consolidated Financial Statements included in Part IV of this Annual Report on Form 10-K, which is incorporated by reference herein.
Intellectual Property Licensing
The Intellectual Property Licensing segment's results of operations for the year ended December 31, 2016 compared to the prior year were as follows (dollars in thousands):
For the year ended December 31, 2016, Intellectual Property Licensing revenue increased 23% compared to the prior year due to a 24% increase in Service Provider revenue and a 22% increase in Consumer Electronics revenue. Service Provider revenue increased primarily due to the inclusion of $52.9 million of TiVo Solutions revenue, which includes revenue from a license agreement executed in the fourth quarter of 2016 with Samsung that included significant catch-up payments to make us whole for the pre-license period of use. Service Provider revenue also benefited from a license agreement executed in the third quarter of 2016 with DISH that included significant catch-up payments to make us whole for the pre-license period of use. These increases in Service Provider revenue were partially offset by an IPG patent license agreement executed in the fourth quarter of 2015 that included significant catch-up payments to make us whole for the pre-license period of use and the expiration of the Comcast license during the current period. The increase in Consumer Electronics revenue was primarily due to the inclusion of $21.2 million of TiVo Solutions revenue, which includes revenue from a license agreement executed in the fourth quarter of 2016 with Samsung which included catch-up payments to make us whole for the pre-license period of use, which was partially offset by a decrease in our licensees' market share, combined with continuing pressures on our licensees' business models, which has caused revenue from CE manufacturers to decline. Such declines could continue unless we are able to successfully license new entrants to this market.
During 2016, we expanded our business strategy of monetizing our intellectual property to include the sale of select patent assets. As patent sales executed under this strategy represent a component of our ongoing major or central operations and activities of monetizing intellectual property, we began recording patent sales as revenue in 2016. Service Provider Intellectual Property Licensing revenue for the year ended December 31, 2016 includes $1.0 million related to patent sales. We expect additional patent sales in the future.
Intellectual Property Licensing Adjusted Operating Expenses increased 31% during the year ended December 31, 2016 primarily due to the effect of including TiVo Solutions' results for the period and a $12.4 million increase in patent litigation and maintenance costs which primarily resulted from the ongoing Comcast litigation. These cost increases were partially offset by cost saving initiatives and a decrease in consulting costs incurred in 2015 related to planning for license renewals with AT&T, Charter, Comcast and DISH.
The Product segment's results of operations for the year ended December 31, 2016 compared to the prior year were as follows (dollars in thousands):
For the year ended December 31, 2016, Product revenue increased 23% compared to the prior year as Platform Solutions revenues increased 49%, while Software and Services and Other revenue declined 1% and 42%, respectively. TiVo Solutions contributed $66.9 million and $6.4 million to Platform Solutions and Software and Services revenues, respectively. TiVo Solutions Product revenue includes $17.5 million of hardware sales for the year ended December 31, 2016. Hardware revenue is expected to decrease in the future as multiple system operator partners shift to deploying the TiVo service on third-party hardware resulting in a decrease in the number of TiVo set-top boxes sold to multiple system operator partners.
Other than the effects of including TiVo Solutions in the results for the period, Product revenues decreased $16.1 million. Excluding revenue from TiVo Solutions, Platform Solutions revenue increased $0.7 million. Excluding revenue from TiVo Solutions, Software and Services revenue decreased $7.5 million primarily due to expiration of the Comcast license during the period which provided for a share of the in-guide advertising revenue, which was partially offset by growth in metadata and analytics. The decrease in Other revenue of $9.2 million was the result of a continued decline in ACP revenue, as well as the year ended December 31, 2015 including a significant perpetual license fee from a manufacturer of set-top boxes. ACP revenue is expected to continue to decline in the future.
Product Adjusted Operating Expenses increased 29% for the year ended December 31, 2016 compared to the prior year primarily as a result of including TiVo Solutions' results for the period. These cost increases were partially offset by a decrease in spending on our metadata operations and legacy guide products due to cost saving initiatives.
Corporate costs primarily include general and administrative costs such as corporate management, finance, legal and human resources.
Corporate costs for the year ended December 31, 2016 compared to the prior year were as follows (dollars in thousands):