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Edited Transcript of TIVO earnings conference call or presentation 31-Jul-19 9:00pm GMT

Q2 2019 TiVo Corp Earnings Call

SAN CARLOS Aug 30, 2019 (Thomson StreetEvents) -- Edited Transcript of TiVo Corp earnings conference call or presentation Wednesday, July 31, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David Shull

TiVo Corporation - President, CEO & Director

* Nicole Noutsios

NMN Advisors - Principal

* Peter C. Halt

TiVo Corporation - CFO

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Conference Call Participants

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* Eric Christian Wold

B. Riley FBR, Inc., Research Division - Senior Equity Analyst

* Hamed Khorsand

BWS Financial Inc. - Principal & Research Analyst

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Presentation

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Operator [1]

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Good afternoon. My name is Josh, and I'll be your conference operator today. At this time, I would like to welcome everyone to the TiVo Corporation 2019 Second Quarter Results Conference Call. (Operator Instructions)

I would now like to turn the call over to Nicole Noutsios, TiVo Investor Relations. Please go ahead.

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Nicole Noutsios, NMN Advisors - Principal [2]

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I'm Nicole Noutsios, Investor Relations at TiVo. With me today are Dave Shull, CEO; and Peter Halt, CFO.

We just distributed a press release and filed an 8-K detailing our second quarter 2019 financial results. In addition, we posted a downloadable model on our IR site showing our historical financial results and GAAP to non-GAAP reconciliation.

After this call, you'll be able to access a recording of this call on our website at tivo.com as well as a transcript of the company's prepared remarks.

Our discussion includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to among other things, TiVo's future product business, operating results and strategies to drive long-term profitable growth; our future product offerings and deployments and market acceptance of these offerings, the future growth, business opportunities and operating results of each of the product and IP businesses; the success of the company's plans to separate the Product and IP Licensing businesses into 2 independent companies and the realization of stockholder value resulting from separation and the tax-free nature, structure and anticipated timing of the separation.

We caution you not to put undue reliance on these forward-looking statements as they involve risks and uncertainties that may cause actual results to vary materially from these forward-looking statements as described in our risk factors in our reports filed with the SEC. Any forward-looking statements made on this call reflect our analysis as of today, and we have no plans or duty to update them, except as required by law.

With that, I will turn the call over to our CEO, Dave Shull.

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David Shull, TiVo Corporation - President, CEO & Director [3]

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Thank you for joining us for the second quarter 2019 earnings call. We have been very focused on execution this year. I'm pleased to announce that we delivered strong financial results across a number of metrics to beat internal and external expectations for Q2, and that we are raising our expectations for revenues and all profitability measures for fiscal 2019 based on the strength of the business. Peter will provide further details later in the call.

This is my first earnings call as TiVo's President and CEO and I am excited to be here. Before I get into the highlights from the quarter, I want to provide some additional color on my background and why it is ideal for TiVo. I will also share my preliminary views after my first 2 months as CEO.

While progress has been made at TiVo, there's still a lot to do as we move forward with the previously announced plan to separate our Product and IP Licensing businesses. My background at DISH and The Weather Channel is directly relevant to our current situation. Shortly after I joined The Weather Channel, we decided to sell the company in 2 parts. I split the company to complete that transaction, a process that we executed in only 3 months. I also prepared the television network for independent operation in a tough competitive environment by cutting more than 20% of the operating expenses, while investing strategically to deliver innovative new digital products. These changes generated substantially improved free cash flow, while also delivering record setting ratings during major hurricanes. I concluded my time at The Weather Channel with a successful sell of both of the businesses.

So why did I take this opportunity? Before I decided to join the company, I did my homework and spoke with a number of key customers who were evaluating TiVo's IP and Product offerings. The consistent feedback I received was that the technical quality of TiVo's Products and IP was very strong, and that the team had a rare, but critical understanding of the complexities of the pay-TV business. In particular, TiVo's Personalized Content Discovery capabilities were consistently named as the best in the business.

TiVo has a proud history of innovation, strong consumer brand recognition and the team dedicated to winning. During my time here, I have traveled around the world and spent significant time with our customers, prospective customers and employees. I am encouraged by the feedback from these conversations. It has all been consistent with the information that I had previously received and confirmed the strength of our product offerings.

After 2 months as CEO, I am confident that we have a strong foundation and that there are numerous exciting opportunities to drive long-term value at TiVo.

As we move forward with the separation, it is critical that TiVo develops a clear strategic vision, rightsizes our operating models and deliver strong execution in order to best position both our IP and Product businesses for long-term success. We are laser-focused on execution and are moving quickly to complete the separation in a timely manner. While there is still a lot to do, I believe both businesses have bright futures if we execute on a clear coherent strategy.

So what have I learned and what is the plan with TiVo? I will start with my thoughts on our Product business. 20 years ago, consumers and our pay-TV customers selected TiVo because of our innovations around the DVR. Today, the world of entertainment has become much more complex and chaotic for consumers. It's not just Netflix, Hulu and Prime, it seems that virtually every content provider has their own direct-to-consumer offerings in the works. Furthermore, it seems like every day, there are more over-the-top offerings in the market. In this rapidly changing landscape, only TiVo helps consumers tame the entertainment chaos. Let me say that again: only TiVo helps customers tame the entertainment chaos by making navigating the sea of entertainment apps simple.

Other platforms offer consumers a scattershot selection of apps that could be clicked on one at a time to determine where their favorite shows might be. At TiVo, not only do we enable customers to easily find what they want to watch across all of their different apps, sources and channels, but TiVo also makes this process of discovering content a personalized experience. The TiVo platform is truly unique in how it provides Personalized Content Discovery across live linear television, subscription video-on-demand services such as Netflix, Hulu, Prime and the emerging digital networks. Our platform recommends shows that we think you will want to watch based on the time of day, day of the week, room in the house and more. We have unique products and patents tied to the underlying artificial intelligence and machine learning required for these recommendations and to the conversation-based voice processing algorithms that help make our customers' content discovery seamless. And we have experience doing this at scale, with more than 22 million households worldwide currently using a TiVo platform to access their video entertainment.

TiVo's Product business has been assembled through a series of acquisitions. Historically, we have too often operated as independent product silos. So I'm taking immediate action to reorganize and break down those walls to form a more cohesive operating structure. As a result, our Product business will be able to better leverage the expertise of each group, improving the quality of our Product portfolio and speed up the pace of innovation. Additionally, I expect these changes to streamline the Product business' operating costs, to improve its standalone EBITDA and to allow us to reinvest in our strategic initiatives around platform footprint and monetization.

To drive long-term profitable growth, the entire Product business will be focused on expanding our platform footprint and then monetizing that footprint with sponsored content discovery, targeted advertising against inventory and our user experience, VOD assets and dynamic live linear programming, as well as selling our TV audience data. We will execute quickly.

Our Product business plans to announce several new innovative products in the second half of 2019 that will further advance how users can seamlessly discover and engage with entertainment.

I would like to highlight several developments in the most recent quarter, which help illustrate where our Product business is heading. 55 out of 56 of our North American TiVo MSO customers are deploying our most advanced TiVo User Experience 4. This solution offers our fully integrated Personalized Content Discovery and these operators are focused on ramping up our conversation-based discovery offerings using voice-based remote controls.

Last quarter, we announced that we had signed the first 2 North American operators who plan to deploy our Android TV version of TiVo User Experience 4. We now have 5 customers who will be adopting our TiVo for Android TV solution. What is really exciting is that not only does this solution meaningfully reduce our customers cost to deployment, but each of these companies also sees this solution rolling out beyond their traditional video subscribers and are looking to deploy this solution to their broadband-only customers as well.

Needless to say, this is a positive development, as it significantly increases our addressable market. As these customers solidify their market launch plans, we will jointly provide details on our growing platform footprint. Additionally, in the quarter, we expanded our Sponsored Discovery advertising offering to include promotion of VOD movie transactions. The campaigns delivered strong performance results. As one example, a leading studio ran a campaign over 3 weekends to promote a new movie title. And the campaign increased transactions by 81% with the people who saw that camping. Our Personalized Content Discovery and Sponsored Discovery capabilities should be attractive solutions as they have proven to reduce churn and increase ARPU for our pay-TV operator partners.

Additionally, TiVo's TV viewership data has expanded to provide customers with more flexibility to meet the ever-changing needs of the market. We have done this by adding additional matching capabilities through identity graph partnerships and premium demographic attributes. As a result, Discovery Communications, one of the leading content providers globally, is now licensing TiVo's TV viewership data.

As you can tell, we have a lot of exciting opportunities in our Product business. We are working hard to make the necessary changes to enable us to deliver profitable growth.

Now I'd like to turn to the Intellectual Property Licensing business. While we have decades of heritage with DVRs and the electronic programming guides, the company's IP portfolio has evolved along with the media industry and is even more relevant and cutting edge today than it was 20 years ago. We have patents that center around the smart home, MoCA, voice recognition and conversation processing algorithms for the video user interface. On the social media front, we also have patents centered around video ad delivery. We plan to capitalize on this base of innovation by strategically expanding our portfolio and closely related smart home and video technologies.

We are also executing on deals to expand our geographic reach outside of the United States. In Q2, we had very strong execution from our IP Licensing business, resulting in a 27% year-over-year improvement in core Intellectual Property Licensing revenues. In particular, we benefited from expanding our relationship with Shaw Communications to include the legacy TiVo IP portfolio. The Shaw Communications license provides coverage for all Shaw video platforms, including BlueSky TV, a syndicated X1 platform. This is just another example of deployed X1 syndication partners who have an IP License for this product.

As previously announced, we also added our first social media customer in our licensing business. This is a large opportunity for us and one that will allow us to monetize our IP platform with a very different and growing customer base. Some other notable wins include Xumo, an ad-supported streaming video service platform; and in early Q3, LG Electronics.

Additionally, I would like to provide an update on our ongoing Comcast litigation. Litigation is a core part of any IP business. While I would always prefer to get to a fair business deal without litigation, if the other party is not reasonable, then we have no choice but to litigate. We have a portfolio of more than 5,000 patents and applications, hundreds of which cover technology innovations related to Comcast's X1 platform user experience. While Comcast may be able to design around any single patent, if we are able to demonstrate that they have violated even a small percentage of these hundreds of patents, the Comcast service will likely continue to lose features that are important to their customers. Because the ITC process only allows us to include a few of these patents at a time, we committed to this lengthy process at the outset. I am always willing to enter into a productive business dialogue. But in the meanwhile, we are committed to the litigation and Comcast continues to incur liability for their violations of our IP. That said, I think it's important to understand that this litigation is not impacting our licensing business success.

We have successfully negotiated deals with all of the major pay-TV operators in the United States. And this quarter, we completed 15 new and renewal IP Licensing deals. As I look to the future, we are focused on growing the business with our social media conversations, consumer electronics providers and new geographic territories. As always, our IP Licensing business will continue to manage its costs to ensure strong returns, while also making targeted investments to drive further growth in our IP portfolio. I'm very excited about the prospects here for our IP Licensing business.

I would like to finish up with a few comments regarding the separation of the business into 2 independent entities. We believe that separation will unlock shareholder value and increase our flexibility in pursuing new and growing market opportunities. We are on track to complete this transaction in the first half of 2020. We intend that this separation will be tax-free to our stockholders and are actively pursuing a ruling from the IRS on that front. We expect a ruling in late 2019 or early 2020.

Further to provide you additional transparency, we anticipate we will be filing our initial Form 10 by Q4 2019. As we have stated previously throughout the separation process, the Board of Directors will continue to be open to strategic transactions for each business that could create additional stockholder value. And to that end, we continue to be actively engaged in discussions with interested parties. While we have made a lot of progress this quarter, we have a lot to accomplish in the coming months. However, after meeting our global customers and employees, I am confident that we have a strong foundation to drive long-term profitable growth.

With that, I will turn the call over to Peter to provide a financial overview of the quarter.

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Peter C. Halt, TiVo Corporation - CFO [4]

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Thank you, Dave. As Dave outlined, we had a very strong quarter and demonstrated that we remain focused on improving the execution of our overall business, while we work on separating the 2 businesses. In addition to delivering strong financial results, we are pleased to raise our expectations for the second time. Before I share with you the progress we made in the quarter, I would like to discuss our improved expectations for fiscal 2019.

We have been very focused on company execution and based upon our performance in Q2, we are raising our expectations for revenue to a range of $650 million to $665 million. We now expect our GAAP loss before taxes to be lower and in the range of $69 million to $77 million. Additionally, we are raising our expectations for adjusted EBITDA to a range of $180 million to $190 million and non-GAAP pretax income of $129 million to $137 million. We anticipate incurring $28 million to $29 million in cash taxes based on our operating expectations.

Additionally, we expect GAAP diluted weighted average shares outstanding to be approximately 126 million and non-GAAP diluted weighted average shares outstanding to be approximately 127 million.

Two points to keep in mind regarding our expectations. First, the first half of the year benefited from the timing of IP litigations spend. As we prepare for our third trial in the ITC, we anticipate higher IP litigation spend in the second half of the year than we spent in the first 6 months of the year. Second, in terms of revenue, Q3 is traditionally a softer quarter for us and Q4 is usually a much stronger quarter, and we would expect that trend to continue this year.

Turning now to our current quarter results. On a consolidated basis, second quarter revenues were $176.2 million, with almost all of our revenue, $174.3 million or 98.9% coming from our core business. We are pleased to have put nearly all of our headwinds behind us. For the second quarter in a row, we had the highest percentage of contribution from core revenues since we closed the TiVo acquisition in Q3 2016.

As previously discussed, we no longer have revenue from the legacy TiVo Time Warp deals, which contributed $8.4 million in revenue 1 year ago. And we have largely transitioned away from selling hardware and analog products, which only contributed $1.7 million and approximately $200,000, respectively, in the current quarter.

In terms of GAAP costs and results for Q2, we can either make progress optimizing the business to decrease our cost structure and prepare us for the separation of the 2 businesses. GAAP total operating costs of $163.5 million were down $18.1 million or 10% from a year ago. This decrease is primarily due to the company's continuing cost reduction efforts, lower amortization of intangible assets and the timing of IP litigation spend as mentioned earlier.

Q2 GAAP operating costs include $33.5 million of depreciation and amortization, $8.9 million in stock-based compensation and $7.5 million of other costs, primarily related to our ongoing restructuring and separation efforts, all of which are excluded from our calculation of adjusted EBITDA. GAAP operating income in Q2 was $12.6 million and our GAAP net loss before taxes was $1.8 million.

In terms of our non-GAAP results, non-GAAP total COGS and operating expenses were $113.6 million, down $7.4 million or 6% year-over-year. This quarter's non-GAAP total COGS and operating expenses benefited from our ongoing cost savings initiatives and the timing of litigation spend. Non-GAAP total COGS and operating expenses include an inventory impairment charge of $2.4 million as we continue our transition away from selling hardware products.

Adjusted EBITDA in Q2 was $62.6 million, up $10.7 million or 21% year-over-year. Non-GAAP pretax income was $50 million, up $12.5 million or 31% year-over-year. The increase in adjusted EBITDA and non-GAAP pretax income are driven by the increase in Intellectual Property Licensing revenue combined with the benefit of our ongoing cost savings initiatives and the timing of IP litigation costs.

For the second quarter, estimated cash taxes were $8.9 million. GAAP diluted weighted average shares outstanding were 125 million and non-GAAP diluted weighted average shares outstanding were 125.5 million. For those interested in calculating our non-GAAP EPS, take our non-GAAP pretax income, subtract our cash taxes and divide by non-GAAP weighted average shares outstanding.

Turning to Q2 segment results. Core product revenues were $83.3 million, down 6% year-on-year. The revenue decline was primarily due to a decrease in consumer subscriber revenue and the prior year benefiting from the recognition of $2.2 million in minimum guaranteed revenues.

We exited Q2 with approximately $76.5 million in contracted quarterly Product run rate revenues. These are contracted revenues, generally long term, for our core products. These measures exclude NRE and advertising revenues, which, while recovering have short-term commitments and are non-core analog products and hardware revenues. We exited Q2 with a $1.5 million increase in contracted quarterly Product run rate revenues from Q1.

Product adjusted operating expenses were $77.7 million in Q2, down 5% from last year. This was primarily attributable to reduced R&D spend as the result of our ongoing cost savings initiatives, partially offset by a $2.4 million inventory impairment as we transition away from selling hardware products.

Moving on to the IP Licensing business. Core IP Licensing revenues were $91 million, up 27% year-on-year, due to the contribution from adding our first social media customer and expanding our IP Licensing arrangement with Shaw Communications to also include the TiVo patent portfolio. In addition to benefiting future periods, expanding our relationship with Shaw was the largest contributor to the $24.5 million in past usage revenues recognized in the quarter. As a reminder, the last of the TiVo Time Warp agreements expired in July 2018, we recognized $8.4 million of Time Warp revenues in Q2 last year.

We exited Q2 with approximately $66.5 million in contracted quarterly IP Licensing run rate revenues, which exclude Catch-Up revenues intended to make us whole for the pre-licensed period of use. This also represents a $1.5 million increase in contracted quarterly license run rate revenues from Q1.

IP Licensing adjusted operating expenses of $21.4 million in Q2 were down 14% from last year. This is attributable to a decrease in IP litigation costs, primarily due to the timing of costs on the ongoing Comcast litigation.

We have a very strong balance sheet with cash and investments at the end of the second quarter of $287 million. The largest use of cash in Q2 was our repurchase of $50 million of our convertible notes, which come due in Q1 2020. This repurchase lowers the outstanding 2020 convertible notes balance to $295 million. We expect to repay the remaining 2020 convertible notes by their maturity dates. Additionally, we plan to refinance our Term Loan B facility before separation of the IP Licensing and Product businesses.

Finally, our Board declared a quarterly dividend of $0.08 per share, which is to be paid on September 19 to stockholders of record on September 5.

With that, I will now turn the call over to the operator to open the line for questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question comes from Eric Wold with B. Riley.

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Eric Christian Wold, B. Riley FBR, Inc., Research Division - Senior Equity Analyst [2]

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A few questions, maybe just one, Peter, just a housekeeping question as to confirm the calculation of the adjusted non-GAAP EPS used in the metrics you gave. I guess, one, for the second quarter, I get to $0.33. Is that correct?

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Peter C. Halt, TiVo Corporation - CFO [3]

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That is correct, Eric.

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Eric Christian Wold, B. Riley FBR, Inc., Research Division - Senior Equity Analyst [4]

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And then it looks like you took your guidance ranges from $0.74 to $0.81 up to $0.80 to $0.85.

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Peter C. Halt, TiVo Corporation - CFO [5]

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Correct.

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Eric Christian Wold, B. Riley FBR, Inc., Research Division - Senior Equity Analyst [6]

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Okay. And then -- so a couple of questions. Just two questions on, I guess, one kind of around the separation and then one kind of around ITC/Comcast. I guess since you announced the separation a few months ago, how has this impacted your discussions with customers either potentially new licensees or renewals? Is that having any impact? You're kind of accelerating discussions as those customers possibly look to avoid given with 2 entities kind of post- the first half of next year and given there's only 1 now? Or does that had no impact? Or your recent thoughts around that.

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David Shull, TiVo Corporation - President, CEO & Director [7]

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Eric, good to tell you. This is Dave. So I think on the Product side, a lot of customers have been relieved that they will no longer be dealing with an IP entity. And so that's been kind of the general tenor of the conversations, which is sort of excitement around some other creative partnerships. There's no longer an IP entity involved. I think on the IP side, there has been a little bit of interest, potentially in accelerating, but it hasn't been a notable factor in our results today, I guess, is what I would say.

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Eric Christian Wold, B. Riley FBR, Inc., Research Division - Senior Equity Analyst [8]

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Perfect. And then, secondly, on kind of thinking back to the ITC initial determination, a month and change ago, in early June, only 1 of the 3 patents was found to be valid and infringed upon. But it looks like Comcast actually defeatured around one of the other patents, the 741 patent, ahead of the ruling and was found not to infringe, the patent was valid. I guess two questions. I guess, one, so the ITC only kind of look at -- what date do they relatively use to determine the infringing, the kind of when the, I guess, the complaint is filed or when the file information is completed? Where in that process is the infringement ruling come in your knowledge? And then with their clear strategy around de-featuring it, if I call the strategy, how does that affect your strategy kind of going forward the ITC and the District Court, you're kind of -- with what's already been filed?

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David Shull, TiVo Corporation - President, CEO & Director [9]

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So let me give a couple of minutes of sort of perspective after a couple of months here, and I'll have Peter answer some of the more specific parts of your question. I think one of the important wins that we had at the ITC was the venue win, which is to demonstrate that Comcast is indeed liable from an ITC point of view with regard to these features. And so, where I'm comfortable is if they are required to sort of serially or one at a time defeature their product, over time, and it'll take time, but over time I think they'll be at the point where they substantially start to hurt their consumer offering. And so that is a long-term commitment for us for litigation. And with your regard to your more specific points, I guess, I'll turn it over to Peter here.

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Peter C. Halt, TiVo Corporation - CFO [10]

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Yes, Eric. It's based upon when the time it was being tried. They agreed to defeature it and take it out. So we were found valid and they were found not to infringe. So it does mean that this brings to 3, the number of features that they're defeatured as a result of the ITC litigation.

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David Shull, TiVo Corporation - President, CEO & Director [11]

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And to sort of restate what I said earlier, from my point of view, we have hundreds of patents that we believe are valid against Comcast. For better, for worse within the ITC venue, we're having to do these a few at a time. But we'll continue to do so until we get to a reasonable business conversation.

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Operator [12]

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Your next question comes from Hamed Khorsand with BWS Financial.

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Hamed Khorsand, BWS Financial Inc. - Principal & Research Analyst [13]

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So first off, I want to ask you (inaudible) the revenue that you booked in Q2, was that just a onetime event as far as just new licensing is concerned or is this going to be ongoing as far as the new customers being signed up in the quarter?

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Peter C. Halt, TiVo Corporation - CFO [14]

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So you got both, Hamed. As we said in the prepared remarks, we had $24 million of onetime Catch-Up revenue in the IP group. But additionally as we talked about the IP group in terms of its run rate, long-term contracted revenue, increased by $1.5 million from Q1 of this year. And the same with Product, its run rate was up $1.5 million also in terms of its core revenue that's long term in contracted. Do recall from the Product side, as we said in the prepared remarks, there are some recurring revenue such as our NRE work and advertising that we have every quarter, but we don't include that in the run rate calculation.

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Hamed Khorsand, BWS Financial Inc. - Principal & Research Analyst [15]

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And why the decision to buyback debt if you're recording a loss for it?

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Peter C. Halt, TiVo Corporation - CFO [16]

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We bought back the debt actually at a slight discount from the market. So we actually paid a little bit less in cash than we would if we were to wait for the maturity date and we look to kind of what we can get in terms of return on our invested cash versus the cash cost of buying it now. So we took $50 million out of the then $345 million outstanding, we're now at $295 million that the loss is -- it's a noncash loss that flows through the income statement.

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Hamed Khorsand, BWS Financial Inc. - Principal & Research Analyst [17]

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Okay. And the last question is, last quarter, you said the same figure 55, 56 are in the deploying stage. I mean is there any progress as far as these customers actually getting into commercial state?

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David Shull, TiVo Corporation - President, CEO & Director [18]

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They're absolutely, is. And so it's live deployments going forward. We're not reporting on that on a detailed basis, but it's happening on a regular basis here. And then for me what was exciting is, it's not just sort of a continued deployment of our Linux product but the expansion on the Android TV side. That stuff's not deployed but the fact that we now have 5 committed customers is exciting because for me, that really raises sort of the potential addressable market here.

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Operator [19]

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There are no further questions at this time. I'll turn the call back to Dave Shull, President and CEO, for closing remarks.

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David Shull, TiVo Corporation - President, CEO & Director [20]

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Thanks all. This is my first call with you. I really appreciate the time. We've been in a quiet period for some time now, but we're going to make it a priority to get out on the road and meet with quite a few of you going forward here in person. So looking forward to those conversations.

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Operator [21]

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This does conclude today's conference call. Thank you for joining us. You may now disconnect.