Q2 2019 Earnings Call
At this time I would like to welcome everyone to the people Corporation 2019 second 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 you would like to ask a question. Please enter star one on your telephone keypad.
I would now like to turn the call over to Nicole Newfield people Investor Relations. Please go ahead.
I'm not calling it yes investor relations at Ti Vo with me today are additional CEO and Peter Hall 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 and our IR site sharing 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 dotcom 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.
Cbres 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 two 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, 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.
Thank you for joining us for the second quarter 2019 earnings call. We have been very focused on execution. This year I am 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 in 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 cheap as 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 two months as CEO .
While progress has been made at Tivo there is 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 two parts.
I split the company to complete that transaction a process that we executed in only three months.
I also prepare 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.
Concluding my time at the weather channel with the successful sale of both of the businesses.
So why did I take this opportunity before I decided to join the company do my homework and spoke with a number of key customers, who were evaluating turbos IP and product offerings. The consistent feedback I received was that the technical quality of fuels 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, Tivos personalized content discovery capabilities, we're 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 spend 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 two 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 rightsized at 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 a bright futures, if we execute on a clear coherent strategy.
So what have I learned and what is the plan with Tivo.
I'll 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 team the entertainment chaos.
Let me say that again, only tivo helps consumers team the entertainment chaos, but making navigating the sea of entertainment apps simple.
Other platforms offer consumers, a scattershot selection of apps that to be clicked on one at a time to determine where their favorite shows might be at tivo not only do we enable consumers to easily find what they want to watch across all of their different apps sources and channels, but tivo also mixes process of discovering content a personalized experience.
The Tivo platform is truly unique in how 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 recommend 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 into the conversation based voice processing algorithms that help make our customers content discovery seamless.
And we have experienced doing this at scale with more than 22 million households worldwide currently using a tivo platform to access their video entertainment.
Tivos 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 of the pace of innovation.
Additionally, I expect these changes to streamline the product businesses operating cost 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 in our user experience.
Video D. 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 illustrates where our product businesses heading.
55 out of 56 of our North American Tivo, Amazon So customers are deploying our most advanced tivo user experience for.
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 two north American operators, who plan to deploy our Android TV version of Tivo user experience for.
We now have five 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 of deployment, but each of these companies also sees the solution rolling out beyond their traditional video subscribers and are looking to deploy the 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 customer 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 the movie transactions.
The campaigns delivered strong performance results as one example, a leading studio ran a campaign over three weekends to promote a new movie title in the campaign increased transactions by 81% with the people who saw the campaign.
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, tivos 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 tivos 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 would like to turn to the intellectual property licensing business.
While we have decades of heritage with Dvrs and the electronic programming guides. The Companys 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 passed since the 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 passed and 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 benefitted from expanding our relationship with shock communications to include the legacy Tivo IP portfolio.
The Shaw Communications license provides coverage for all Shaw video platforms, including Blue Sky TV, a syndicated X one platform.
This is just another example of deployed X one 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 zummo, 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.
Well I would always prefer to get to a fair business deal without litigation if the other party is not reasonable than we have no choice, but to litigate.
We have a portfolio of more than 5000 patents and applications hundreds of which cover technology innovations related to Comcast Xone 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 cost 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 two independent entities.
We believe the 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 intended the separation will be tax free to our stockholders and are actively pursuing a ruling from the IRS on that front, we expect a really 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.
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 two 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 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 litigation spend.
As we prepare for our third trial and the ITC, we anticipate higher IP litigation spend in the second half of the year than we spent in the first six months of the year.
Second.
In terms of revenue Q3 is traditionally a softer quarter for us in 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 put nearly all of our headwinds behind us.
For the second quarter in a row, we had the highest percentage contribution from core revenues as we close the Tivo acquisition in Q3 2016.
As previously discussed we no longer have revenue from the legacy Tivo tie more deals, which contributed $8.4 million in revenue a year ago, and we have largely transitioned away from selling hardware and analog products.
Which only contributed $1.7 million at approximately $200000, respectively in the current quarter.
In terms of GAAP cost and results for Q2, we continue to make progress optimizing the business to decrease our cost structure to prepare us for the separation of the two businesses.
GAAP total operating cost 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 cost include $33.5 million of depreciation and amortization $8.9 million in stock based compensation and $7.5 million of other costs, primarily due 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 included 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 pre tax income was $50 million up $12.5 million or 31% year over year.
The increase in adjusted EBITDA and non-GAAP pre tax 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 pre tax income so tracks, 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 guarantee revenues.
We exited Q2 with approximately $76.5 million and contracted quarterly product run rate revenues.
These are contracted revenues generally long term for our core products.
These measures exclude NRG and advertising revenues, which while recurring have short term commitments and our 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 that the result of our ongoing cost savings initiatives.
Partially offset by a 2.4 million dollar inventory impairment as we transition away from selling hardware products.
Moving on to the IP licensing business.
Or 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 with 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 tie more 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 license 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 cost 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 lowered the outstanding 2020 convertible notes balance of $295 million.
We expect to repay the remaining 2020 convertible notes by their maturity date.
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 eight cents per share which to be paid on September 19th to stockholders of record on September 5th.
With that I will now turn the call over to the operator to open the line for questions.
Operator, we would like to ask a question at this time. Please press Star then the number one on your telephone keypad.
Our first question comes from Eric Wold with B. Riley Your line is open.
Thank you and good afternoon.
A few questions I guess, one is Peter just.
Housekeeping question is to confirm the calculation of the adjusted non-GAAP EPS using the.
The metrics you gave I guess, one near term for the second quarter I get to 33 cents is that correct.
That is correct.
And then it looks like you took your guidance ranges from.
74 to 81 cents to 80 to 85 cents correct.
Okay.
And then a couple of questions just two questions on I guess, one kind of around the separation and then one kind of Ron.
Itcs slides Comcast I guess since you announced the separation.
Yes, a few months ago, how is this impacting your discussions with customers either.
Well potentially new licensees or renewals.
Are you, having any impact youve got accelerating discussion those concerns, possibly look to avoid giving a two entities kind of post the first half of next year and dealing Willy one now or is it had no impact or maybe some thoughts around that.
Good show 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 thats been kind of the general tenor of the conversations which is which has sort of excitement around some other creative partnerships. There is no longer an IP entity involved.
I think on the IP side, there's been a little bit of interest potentially an accelerating.
But it hasn't been a notable factor in our results today, I guess, what I would say.
Perfect and then.
Secondly on.
Yes, I think you back to the ITC initial determination.
Yes, a month and change ago in early June .
Only one of the the three pads is found to be valid infringed upon but it looks like Comcast atg DC cheering around one or the other pad Sevenforty. One patent ahead of the ruling.
And it's down a notch infringing on our patent was valid I guess I guess two questions I guess one to the.
In the ITC only kind of look at what they do they do we use during the German the infringing is going to win the deal.
I guess, the incomplete and smile is that when the foundation is completely unaware that process is the infringement ruling coming in your knowledge and then.
Hi, there.
Strategy here around DDG, if I call the strategy.
How does it affect your strategy going and going forward. The ideas units your core UK, what's already been filed.
So let me give a couple of minutes of sort of prospective after a couple of months here and I'll be happy to answer some of the most more specific parts of your question.
I think I think one of the country one of the important wins that we had at the ITC was a venue when wishes to demonstrate that Comcast is Andy level from an ITC point of view with regard to these features and so we are uncomfortable is if they are required to sort of see early or one at a time the feature their product.
Over time, it will take time, but over time I think they will be at the point, where they substantially start to hurt their consumer offering and so that is a long term commitment from us for litigation.
And with regard to your more specific points I guess I'll turn it over to Peter here, Yes, Eric It's based upon when the time is being tried they agreed to feature it take it out. So we were found valid they were found to infringe.
So it does mean that this brings to three the number of features that they are de featured.
As a result of the ITC litigation.
And so to 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 win within the ITC venue, we're having to do these a few at a time.
But we'll continue to do so until we until we get to a reasonable business conversation.
Helpful. Thank you guys.
Okay.
Your next question comes from Hamas correspond with BW S. financial your line is open.
Hey, So first off I wanted to ask you.
Thank you the revenue that you booked in Q2 was that just one time events.
As far as new licensing.
Concerned or is this going to be ongoing as far as new customers that you signed up in the quarter.
So you got both Amod as we 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 you know the IP group in terms of its run rate you know long term contracted revenue.
<unk> increased by 1.5 million up from Q1 of this year and the same with product. Its run rate was about a 1.5 million also in terms of its core revenue that's our long term uncontracted.
Do recall from the product side as we said in the prepared remarks, there are some recurring revenue such as you know in our you work in advertising that we have every quarter, but we don't include that in the run rate calculation.
And why the decision to buyback debt, if you're recording a loss for it.
We bought back the idea that that actually had a slight discount from a you know that the market.
So we actually paid a little bit less in cash.
Then we would if we were to weight to the maturity date and when you look to kind of you know what we can get in terms of return on our invested cash first the cash cost of buying it now. So we took 50 out of that then 345 outstanding went out to 95.
The loss is a non cash loss you know that goes that flows through the income statement.
Okay and last question is yes last quarter you said the same figure of 55 56 are in the deploying stage me is there any any progress as far as.
These customers actually getting into commercial space.
There absolutely is and so it is no live deployments going forward.
We're now reporting on that on a detailed basis, that'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 five committed customers is exciting because for me that really raise is sort of the potential addressable market here.
All right. Thank you.
There are no further questions at this time I'll turn the call back to gain shelf, president and CEO for closing remarks.
Thanks to all this is my first call with you I really appreciate the time you know we have been in a quiet period for some time now but were 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.
This does conclude today's conference call. Thank you for joining US you may now disconnect.