Q3 2019 Earnings Call
Turning my name is Stephanie and I will be your conference operator today at this time I would like to welcome everyone to the Ti Vo Corporation 2019 third quarter results Conference call. All lines have been placed on mute to prevent any background noise at the end of the call. There will be a question and answer session. If he would like to ask your question. Please press star one.
And your telephone keypad I would now like turn the call after Nicole Knits, Yes detailed investor Relations. Please go ahead.
I'm nickel Napier Investor Relations at Ti Vo with me today, or Dave show, CEO and Peter <unk> CFO .
Just distributed a press release and filed an 8-K detailing our third quarter 2019 financial results.
In addition, we posted a downloadable model and our IR site.
And historical financial result, GAAP to non-GAAP reconciliation.
We are also webcasting this call and along with the audio we are webcasting slides that we will reference during portions of today's call.
After this call you'll be able to access a recording of this call on our website at <unk> Dot com valid the transcript the company's prepared remarks.
Our discussion includes forward looking statements within the meaning of the private Securities Litigation Reform Act.
1995.
These statements relate to.
Another thing he was featured product business.
Operating result, this strategy to drive long term profitable growth.
A future product offerings and appointment and market acceptance of these offerings.
Future growth.
This opportunity and operating results at each of our product and I P businesses.
Exactly the company's plan to separate the product and IP licensing businesses into two independent company.
And the realization of stockholder value.
I don't think or separation and the tax free nature structure and anticipated timing at 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 could vary materially and these forward looking statement.
As described in our risk factor in a reports filed with FCC any forward looking statements made on this call reflect our analysis as of today, we have no plans or duty to update them, except as required by law.
With that I will now turn the call over true CEO , Dave. So thank you for joining us for the third quarter 2019 earnings call. We are very focused on company execution. This quarter, we delivered solid financial results in the quarter, well accomplishing key business milestones, we streamlined our.
Ration and improved non-GAAP , opex and adjusted EBITDA year over year.
Also for the second consecutive quarter under my leadership, we are increasing our fiscal 2019 expectations for adjusted EBITDA.
In addition to the financial results, we continue to make progress on our separation process and also successfully launched people plus last month.
We'll discuss all of these in further detail later in the call on the product side of the business. We are extremely proud of our track record of innovation.
And we're going to bring that track record for it into this new chapter for Tivo Tivo is well positioned to capture a significant market opportunity.
The streaming war, so given rise to numerous direct to consumer and over the top offerings with new names popping up seemingly every day.
Separation of video apps is overwhelming for consumers. So tivo is committed to bringing all entertainment together in one place.
Making it easy to find watch and enjoy your favorite shows.
Only people can cut through all the quarter by providing a neutral fully integrated platform for consumers to find and watch all of their favorite shows regardless of the content provider.
To deliver on this mission, we need to execute rigorously.
The first up is to expand the entertainment options on the Tivo platform.
There's an opportunity to expand the basic consumers using the t. both experience.
And then to generate income from their engagement with real time live TV.
Subscription video on demand services and the emerging digital entertainment channels and shows last month, we took the first products step toward this vision by launching people plus.
People plus delivers live streaming channels and thousands thousands of movies and TV shows to viewers in an app free environment, making them easy to find watching enjoy.
People plus provides access to internet based content for tivo customers translating into opportunities for advertisers to reach highly engaged television audiences.
People plus we'll continue to roll out to more of our customers over the next several weeks and we'll continue to add more premium content for well known publishers in the coming months and ongoing basis.
As we went to the future, we'll be rolling out more innovative products and services in the coming months, where the ultimate goal a more than doubling the existing households of over 21 million that we already proudly serve.
If successful this strategy has the potential to drive significant product revenue for Tivo, We also expanded or Android TV based IP TV version of the people user experience platform. We now have seven north American operators, who will deploy the solution.
Including to their broadband only households, that's up from five last quarter and we continue to expand internationally in the quarter Liberty Latin America.
Selected people to bring cutting edge innovations to the video customers in Puerto Rico, and they plan to watch the people platform in other markets across Latin America as well at the core of our promise to consumers that we will make it easier to find watch and enjoy content is tivos personalized content discovery.
Powered by T., both natural language boy solution.
We believe that the machine learning technology underlying this solution is unique.
He will provide the solution that incorporates both real time live linear programming as well subscription video on demand services, such as Netflix Hulu Prime and all of the emerging digital entertainment channels.
This quarter border phone further endorsed our solutions by agreed to deploy People's content discovery solution. That's part of the new Vodafone TV service in Portugal, which is the first countries are deployed new intelligent voice search feature that utilizes People's natural language voice solution.
In addition, Ortiz USA adopted People's content discovery platform to power in subscriber entertainment platform, our content discovery engine realize not only on sophisticated machine learning algorithms, but also on a knowledge graph that unites all of our entertainment Medidata with real time, social media trends.
People generates monthly recurring revenue from subscribers using our content discovery solutions.
So as our solutions are deployed.
Add to our long term contracted base.
On the cost side. It is critical that we right size, our operating models in order to best position, both product and IP licensing businesses for long term success.
We made good progress in the quarter by reorganizing the product business in order to streamline operations and increased efficiencies.
We expect an acceleration of the improved operating costs in Q4 and into next year.
We also expect these improvements will streamline the product businesses operating costs and improve our standalone adjusted EBITDA.
This will provide us the resources to reinvest in value, creating strategic initiatives.
As you can see we have made a lot of progress in our probably business and our focus on execution rightsizing, the business and driving the necessary changes to enable us to deliver profitable growth.
Our IP licensing business continues to build on the strong diverse base of customers ending Q2 reported 8% year over year revenue growth.
We remain focused on expanding our customer base further into the social media and consumer electronics markets, while also expanding into new geographic territories.
We are seeing significant demand for our IP portfolio in international markets.
This quarter, we license a number of over the top and IP TV video streaming providers.
We signed a new deal would do you live to license O.G.P. services in Korea.
We have also renewed a multiyear license with such TB and Australian IP TV provider.
Canada is an area of future expansion for us as another step in expanding our customer base in Canada, We signed a new multiyear license agreement with Canadian operator Eastlink.
Additionally, I would like to provide an update on our ongoing Comcast litigation people is fully committed to protecting intellectual property from unauthorized use and we are committed to our litigation strategy.
We expect Comcast will eventually pay license for our innovations just as its pay TV peer companies do and as Comcast itself is done in the past.
On that front, we are pursuing cases in the ITC and the district Court system.
And I would like to provide an update a where we're out in the process.
The commission extended its time to issue its final determination in the second ITC case to December 16th.
The third ITC case will be held from January 17th to the 20% 2020.
The administrative law judges initial determination for the third ITC case is due by June 29, 2020 in the Commission's final determination is due by October 29, 2020, we continue to believe that separating the IP licensing and product business is the best strategy to maximize shareholder is.
Got you in today's rapidly evolving market landscape.
As standalone separate entities unconstrained by each other the two businesses will be better position to pursue growth opportunities. We have made good progress with the separation process. The company is actively interviewing candidates to build the management teams of both companies standing up separate systems and working with the IRS and the FCC.
He to prepare for separation.
We are currently targeting completion of the transaction in April 2020, and will provide further updates in the coming months.
He was board of directors decided not to declare a cash dividend this quarter due to the impending separation of the businesses.
The company Repays its remaining 2020 convertible notes by their maturity date refinances the term loan b and separates the businesses. It is critical for people to maintain cash for investment in People's growth strategies going forward.
This will assist us in optimizing the to balance sheets for the separation.
As we've stated previously throughout the separation process. The board of directors will continue to be open to strategic transactions that could create additional stockholder value into that and we continued to be engage in discussions with interested parties. We made a lot of progress this quarter and I look forward to continuing our momentum in future quarters, I will turn the call over the.
Peter to provide a financial overview of the quarter.
Thank you Dave.
As Dave just outlined we had a strong quarter and continue to make improvements to streamline the business.
As we improve our financials, we are tightening the range for our fiscal 2019 revenue expectations and increasing our adjusted EBITDA expectations.
I will discuss this in more detail later in the coal.
Turning now to our current quarter results.
On a consolidated basis third quarter revenues were $158.5 million.
Yeah, total operating costs and expenses of $296.2 million were up $123.9 billion or 72% from a year ago due to 137.5 million dollar non cash goodwill impairment charge.
Excluding this non cash charge total operating costs and expenses were down by $13.6 million or 8% year over year due to reduced compensation cost as a result of our cost savings initiatives and lower amortization of intangible assets, partially offset by separation and transformation.
Cost.
We're very focused on optimizing our business for our separation of the IP licensing and product businesses.
In Q3, we made progress on Rightsizing, our cost structure for future success by taking actions that will create approximately $7 billion an annualized savings.
In October we took additional actions, which will result in an additional $8 million an annual savings.
For a combined annualized savings of $15 million.
Q3, GAAP operating cost also include a $33.5 million of depreciation and amortization $9.5 million of separation and transformation costs $5.1 billion and stock based compensation and $2.2 million of other costs, primarily related to our ongoing cost savings initiatives.
All of which are excluded from our calculation of adjusted EBITDA GAAP operating losses in Q3 were $137.7 million and our GAAP loss from continuing operations before income taxes was $149.1 million turning back to the noncash goodwill impairment charge.
$29.3 million this charge related to our product business and was due to the sustained decrease in our stock price and a reevaluation of our long term plan for the product business under our new executive leadership. This sustained decrease in our stock price also caused us to report up 58.2 billion dollar noncash goodwill impairment charge related to.
Our IP business.
This impairment charge represents 5% or IP businesses goodwill.
In terms of our non-GAAP results.
non-GAAP total Cogs and Opex was $108.5 million.
Down $9.2 billion for 8% year over year.
This quarter's non-GAAP total Cogs and Opex benefited from our ongoing cost savings initiatives adjusted EBITDA in Q3 was $50.1 million up $3 million or 6% year over year, non-GAAP pretax income was $36.8 million up $3.9 billion or 12% year over year.
The improvement in adjusted EBITDA, a non-GAAP pretax income were driven by our previously discussed cost savings initiatives for the third quarter estimated cash taxes were $6.3 million GAAP diluted weighted average shares outstanding were 126.1 million and non-GAAP diluted weighted average shares outstanding were 126.9.
Millions for those interested in calculating our non-GAAP EPS take our non-GAAP pre tax income subtract, our cash taxes and divide by non-GAAP weighted average shares outstanding turning to Q3 segment results core product revenues were $79.2 million down 11% year over year Q3.
2018 offers a hard compared with this past quarter as that quarter included a 3.3 million dollar benefit from a passport contract renewal that included guaranteed minimums that we're all recognized in the quarter. There was also a reduction in revenues recognized the drug order of approximately $1.8 million related to adjusted reporting of subs from Latin American operator.
Yes, we did not have somewhere adjustment a year ago, nor do we anticipate a similar adjustment next quarter.
Additionally, in Ari and consumer subscription revenues contributed to the year on year decline.
These revenue declines were partially offset by an increase in revenue from an international pay TV operators exceeding its cumulative contractual minimums in 2019.
We exited Q3 with approximately $73 million and contracted quarterly product run rate revenues.
These are contracted revenues generally long term for our core products.
Decreasing contract the quarterly product run rate revenues from Q2 was driven by the adjusted reporting of subs from Latin American operators previously mentioned and a decrease in Medidata revenue.
Product adjusted operating expenses were $69.4 million in Q3 down 13% from last year.
This was primarily attributable to our ongoing cost reduction efforts as we reduce both compensation and contractor costs.
Moving onto the IP licensing business.
Core IP licensing revenues were $75.7 million.
Up 13% year over year due to a 4.1 billion dollar increase in catch up payments and the strength in the business.
As a reminder, the last of the Tivo time off agreements expire in July 2018, and we recognize $2.8 million apply more revenues in Q3 last year.
We exited Q3 with approximately $68 million in contracted quarterly IP licensing run rate revenues, which excludes catch up revenues admitted to make us hold for the pre licensure interviews IP licensing adjusted operating expenses of $25.7 million in Q3 were up 9% from last year.
This is attributable to a 1.5 million dollar impairment of a prepaid license and 0.5 million dollar increase in IP litigation costs, primarily due to the timing of ongoing litigation.
We have a strong balance sheet with cash and investments at the end of the third quarter of $282 million, we expect to refinance our term loan b facility before year end and to repay the remaining 2020 convertible notes by their maturity date.
We've been very focused on company execution and based upon our performance in Q3, we narrowed the range and are raising the low end of our revenue expectations.
Our revenue expectations for the year are now $655 million to $665 million.
This raises the midpoint of our revenue expectations to $660 million due to the noncash impairment charge. We are now expect our GAAP loss before taxes to be larger and in the range of $198 million to $203 million.
Additionally, we are raising our expectations for adjusted EBITDA to a range of $190 million to $200 million.
And non-GAAP pretax income of $137 million to $145 million.
We anticipate occurring 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 be approximately 127.
With that I will now turn the call over to the operator to open the line for questions.
Operator.
At this time, if he would like to ask your question. Please press Star then the number one on your telephone keypad again that started in the number one our first question comes from a line of Sterling Auty with JP Morgan.
Hey, guys. This is all hell on for Sterling.
Thank you for taking my questions So what key steps.
Taken to split the company into the product and IP businesses on what key steps I live.
We've we've done some work with the IRS than the FCC. We've also taken this is Dave we've taken some substantial steps with regard to splitting the company. So we've clearly identified which employs or go into which organization post split we're in the process of evaluating a complete management teams for both companies.
So split and I expect a will resolve that in the next couple of weeks here and be ready to announce that as well. We're you know as I mentioned, we're targeting April 2020 to complete the final split of the companies and so I expect that we'll be doing road shows with investors during Q1 as well.
HM Okay. Thank you.
What can you is good and affordable and know what happened to do it revenue run rate from that customer.
So.
For us.
Terms of revenue run rate, if you're asking about site Pico our revenue run rate went up but thats. The result of new business. We are contracted a core revenue with upfront.
66, and a half day last quarter to 68 million on the product goes side as I talked about the prepared remarks. It did go down a portion of that approximately 2 million of it related to some reporting adjustments that went back for a couple of years from some Latam operators.
We didn't have a similar to that next quarter. It nor do we expect when next quarter. So you can expect to see that revenue return and then as I mentioned the prepared remarks, a little bit down on Medidata in terms of contracted revenues. We've let a couple of contract contracts with customers labs in territories, we no longer seats strategic fighting Medidata.
HM Okay. That's very helpful. Thank you.
Our next question comes from a line of Eric Wold with our with B. Riley.
Thank you good afternoon guys.
I guess for Peter just you can you confirm the do non-GAAP diluted EPS calculations from the.
And for you provide I get to 24 cents for Q3 and it looks like you took full year.
From a range of 80 85 to range of 86 to 91.
Your calculations corrector.
Alright, thank you.
Turning to reconcile.
Comments around the product segment.
Obviously, a lot going on with the product division in terms of Tivo plush rolling out experience for getting acceptance, there and rollouts a lot of the new kind of revenue generating opportunities to come from those it sounds like things are getting some momentum.
And then part of the comment around the goodwill impairment charge was.
The decrease in a long term forecast for the product that is trying to reconcile those two things.
This is Dave let me provide a little bit context from my point of view I'm into the there is an obvious hardware, which is the stock prices down.
You know since the beginning of the year and so that drove a lot of the adjustment.
I came in and did a pretty thorough sort of review of the long range plans and I want I want to make sure that what we put out there in front of the board in front of investors is very very credible and very very specific so we've taken some significant steps on the execution front, you've seen that on the cost side already come through the numbers a little bit it's can take a little bit longer for <expletive> .
Come through on the revenue side.
For the first steps are there which is to consolidate all the product team all the engineering team in one place to remove all the business group operations that we've had in place operating separately into say were one unified team on the product side marching towards one strategy that also really focuses our revenue goals for 2020 and beyond to say that we're very focused on the.
The concept of bringing all this entertainment together, we're all about making it easier to find and watch and enjoy the content. That's driving a very specific set of product development efforts and probably deployment efforts Tivo plus is a big first step for us because this has not historically content company. This is a company that's been design in hardware so for us to shift and say.
We can actually deploy a bunch of content assets on the table plus brand is a big step, but you're going to see really the next.
What I would call sort of a coming out party.
Early next year around CES and around the Q1 Road show and I think at that point will be a lot clear kind of what we're looking at in terms of ramping up the deployment of the Tivo experience based on where we see the future growth for the product side coming.
Okay and then thank you and then on the on the cost reduction process you you laid out another.
7 million that you run rate because there are annualizing Q3, another eight nine.
In October .
I guess, if I look at the annual EBITDA guidance for the other 190 to 200.
How much of the cost cuts you've taken as a bar are going to be in that number versus kind of what's still to come.
You all else being equal gonna heading into next year and the kind of wells you think it's kind of beyond even those levels.
We'll have one full quarter for the actions taken in Q3.
You'll have a partial quarter you know about two thirds reported for the actions taken in October so you'll see a much more meaningful benefit from these act the $15 million next year.
Well it will definitely have more coming next year, we're not quite ready Eric to lay out the details of what that's going to look like again I would say expect that early next year as we kind of hit the road with investors.
But there is there some there's some.
Timing issues with regard to standing up separate systems, and making sure that we have full management teams on both sides stood up and then once that's completed I think you'll see a even more aggressive changes on the cost side to make sure that were competitive deferrable protocol and I'd be cool.
Okay.
And then just final question Tony.
Yes, you can figure still engagement interested parties.
So essentially it's still a dual card processor to step at the spin or sale.
Obviously this has been going on for.
Interested parties for well over a year I guess is there one or two items gating items going to keeping somebody from getting done as it is it.
But you give structure as it is it is evaluation.
You can point to there and then is there kind of a you know.
A a alternate deadline you kind of get Tunis, you pull recorded its a split or if there is someone kind of still there can it linger past April .
I guess I would say, we put the deadline of April out there because we think that we're on a very good operating path to get there and that's that is our default solution. You know that being said of course were publicly traded so if the right offer comes together, we'll do that deal and hopefully the investors are happy as well.
I I do believe that post separation, there's a lot more latitude for creative conversations I think the complexity of the split has made some of these conversations certainly slower and more complex than I would've hoped and so I do think whether whether these companies are buyers or sellers post split I don't know, but I do think theres. Some very interesting combination that should be.
Happening in the industry on both the IP side in the product side post split here if not before.
Thank you.
Your next question comes from the line of Courson with BW U.S. financial.
Hi, I'm. So first question I had was in regards to tivo experience for.
Do you set expectations to what percentage of the cable operators customers switch over to Tivo experience for this next year.
I'm going I don't think we have a this is Dave I don't think we have a real we don't have a specific number in mind.
I would say experienced for feedback from the customers has been very good but as you know takes time for them to roll out the capex to upgrade the boxes or whatever else may be required to kind of moved from their prior systems to experience for I'm, probably more excited about the Android TV IP TV solution I think it provides real cost advantages to them as they're looking at both the path.
Capex the cable episodes and the operators. So the fact that we went from five signed.
Misos to seven I think is very strong endorsement of that we're starting to see that rollout in the market and we'll keep you updated as we start to get some high volume numbers, there as well, but but we're excited about that and we're also very excited about the endorsement that we got from Liberty Latin America, indicating that this is not just a U.S. potential that theres real strong potential down of.
Because well.
And then on on the one pass searches product that you do you have because that can I guess.
Alan Carr approach are you trying to just bundle it altogether in the people experience for.
I'm, a big fan I guess of the of the integrated user experience, we certainly sell some of the content discovery capabilities and separate components. As you noted some of the biggest operators, but I think I think from a search point of view I think the integration into the Tivo experience is probably the best customer approach.
Okay and then my last question any timing changes to revenue being recognized in Q3 versus Q4, I know Q3 was supposed to be a very weak quarter compared to Q2, but it was you guys be expectations. Now you said, you're not really bumping up Q4 your numbers either.
Well, we raised the lower end of our guidance, which raised the midpoint.
As has historically been the case you know Q4 is off to the forcing function with some of our customers for IP deals. So we continue to expect that Q4 would be a better quarter than Q3 and that would be in line with the past.
Okay. Thank you very much.
Thank you at this time there no further questions I would like to turn the conference back over to Dave Chappelle, President and CEO for closing remarks.
Well first of all thank you all very much for your time today I've had a chance to meet quite a few of you and look forward to doing that again in a couple coming months, whether it's at the consumer electronics show in Vegas or on our road show for the two companies you're going forward.
We're very very focused on execution, whether that is optimizing the cost base launching new products and so look forward to rebuilding the momentum here or tivo and making sure that we delivered great results for investors. Thank you all very much.
Thank you. This concludes today's conference you may now disconnect.
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