Executives
Mark Beariault – SVP, General Counsel and Secretary
Ben Bennett – CEO
Shum Mukherjee – EVP and CFO
Analysts
Ali Mogharabi – B. Riley
Todd Mitchell – Kaufman Brothers
OpenTV Corporation (OPTV) Q3 2008 Earnings Call Transcript November 6, 2008 5:00 PM ET
Operator
Good day, ladies and gentlemen, and welcome to the third quarter 2008 OpenTV Corp. earnings conference call. My name is Erika and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator instructions) As a reminder, this conference is being recorded for replay purposes. I will now like to turn the presentation over to your host for today’s call Mr. Mark Beariault, General Counsel. You may proceed, sir.
Mark Beariault
Thank you, Erika. Before we begin today, I would like to highlight that beginning this quarter we will make available a short slide presentation in PDF format containing information about OpenTV that members of management may refer to on our quarterly conference calls. For this call, our presentation is focused on financial metrics. We thought it would be helpful for investors to view the presentation as they listen to the call. So I invite you now to access the presentation by visiting the Investor Relations of our website located at www.opentv.com.
Also, I would remind you that during this call, members of OpenTV’s management, in addition to discussing the actual results of this past quarter, will be making forward-looking statements. These forward-looking statements are based on our current expectations and beliefs and are subject to a number of factors and uncertainties that could cause our actual results to differ materially from those described in these forward-looking statements. For example, statements regarding forecasted growth of the markets for our products, our ability to expand our product offerings, our ability to maintain the momentum in our revenue growth and to achieve positive net income, and our financial guidance for 2008 are all forward-looking statements.
For a detailed discussion of the factors and uncertainties that could cause our actual results to differ materially from those described in these forward-looking statements, please refer to the risk factors described in our form 10-K filed with the SEC, and any updates to those risk factors contained in our quarterly reports and the other documents we file from time-to-time with the SEC. Those documents and reports can be viewed on the Investor Relations page of our website. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
During this call we will also refer to certain non-U.S. GAAP financial measures, such as adjusted EBITDA and billings, which management believes are helpful in understanding our business and performance. We have included a reconciliation of those measures to U.S. GAAP measures on the Investor Relations page of our website. We will also make available a webcast replay of this conference call on our website.
With that, I will turn to call over to Ben Bennett, Chief Executive Officer of OpenTV.
Ben Bennett
Thank you, Mark, and welcome everyone to OpenTV’s third quarter 2008 conference call. Joining me today is Shum Mukherjee, our Chief Financial Officer.
OpenTV reported solid third quarter results earlier today including revenue of $26.5 million and net income of $1 million. Our fundamental financial objective for the Company is to establish long term sustainable profitability and growth and I am pleased to report that we remain on target to meet that objective.
Our projected outlook for the full year of 2008 now calls for positive net income, which would be the first profit of the year in the Company’s history. We also continue to generate positive cash flow and we maintain a sound balance sheet with no debt.
In the context of the current economic climate, we believe our strong balance sheet and continued cash generation will position us well in terms of being able to continue investing in our products and our people. I’d like to briefly reduce a few business metrics that evidence strength of our market position and our geographic diversity.
In the third quarter, 4.6 million OpenTV enabled digital devices were shipped worldwide, bringing the total to-date to 116 million. Of this total, 6.3 million are PVR enabled devices and shipments of these devices grew year-over-year by 51%. This is actually a key metric to monitor moving forward as HD DVR platforms, particularly those with IT return parts provide OpenTV with more opportunities to up sell in areas such as video on demand, advanced advertising, home networking, and advanced IP aware interactive applications.
On the Advertising side, OpenTV’s campaign management solutions now deliver national and local spot advertising to almost 28 million cable subscribers in the United States representing 46% of total U.S. subscribers.
With those metrics as a backdrop of I’d like to highlight a few significant customer events that occurred this quarter in the geographic regions we serve. We’ll start with Asia Pacific where I am happy to announce that our project for Sky Perfect TV, operated by Japan’s largest pay TV operator, which we announced on our last earnings call, is on track.
This is a significant engagement for us that leverages our next generation HD DVR and will ultimately enable some of the most advanced HD interactive services available in the marketplace today.
We also remain active in emerging markets, India in particular. As many of you know, we appointed an experienced general manager based in Mumbai to lead our expansion in the country as well as to sign local engineering support to help OpenTV customers with their deployment in the region. These customers currently include DishTV of the Essel Group, Big TV of Reliance Communication and Sun Direct TV.
Another region of focus for OpenTV is South America where we are building on our strong relationship with NET in Brazil and are currently in discussion with other operators in the region particularly in cooperation with our distribution partners.
In EMEA, one of our more developed markets, we were selected to power a new range of next generation digital services including HD, DVR, and VOD for VOO, Belgium’s newest cable operator. VOO provides analog and digital TV, high speed Internet access and fixed telephony services to more than 1.2 million subscribers in Belgium.
In Addition to new customer activity, OpenTV’s project teams are currently working on significant launch activities with customers such as UPC, Portugal Telecom, ZON TV Cabo, Numericable, BSkyB, and MultiChoice South Africa.
Meanwhile, in the U.S., we once again renewed our license agreement with Dish Network for another year, reaffirming one of our longstanding and important relationships.
We are also in beta testing for our turn-key IPTV solution for the telco market developed with our partner Innovative Systems. As some of you may recall, OpenTV and Innovative teamed up about two years ago to develop a solution for Tier 2 and Tier 3 telcos in the U.S. We are excited to be actively now testing the solution with customers in several locations.
We also have some positive customer developments in our Advertising business in the U.S. I am pleased to announce today a new deal with Time Warner Cable to upgrade several regional operating centers to EclipsePlus, OpenTV’s latest campaign management platform for cable ad sales operations. They have agreed to install EclipsePlus in five regional operating centers representing over 11 million subscribers. In addition, as we announced yesterday, Comcast Spotlight has now deployed our EclipsePlus product in three of their key markets.
We have also seen increased adoption of EclipsePlus by other U.S. MSOs, notably the New York City interconnect for Cablevision, the Great Lakes division for Charter, and a recent upgrade deal with Midcontinent Communications for their North and South Dakota markets.
All in all, we have a relatively robust customer activity to report in both our Middleware and Advertising businesses. At the same time we are also working hard on our next generation of technologies and products. In Middleware, our developers are currently working on our sixth generation Middleware platform. This advanced multi-application platform will support solutions for hybrid IP networks and innovative unified user interfaces. We will provide additional details as we move closer to beta testing of these products.
On a related note, during the quarter, we announced our acquisition of Ruzz TV, a Sydney-based provider of digital TV technologies that enable broadcasters to manage their work flow and content distribution processes quickly and efficiently. We came to know Ruzz TV through our relationship with FOXTEL, which is an important strategic News Cop. Customer of OpenTV. It became clear to us that Ruzz TV’s expertise and technology addresses a small unimportant technology need in our roadmap related to broadcast content management and meta data management, the digital TV user interfaces. This was a small acquisition, immaterial from a financial perspective, but strategically it’s complementary to our next generation products.
So, in summary, OpenTV is executing. The actions that the management team have taken over the last several quarters are beginning to manifest themselves into tangible results. However, like many companies we are actively monitoring the potential impact of the current economic downturn worldwide and the impact this may have on our customers. While the digital TV sector has in the past been considered recession resistant, we remain vigilant as to what our customers are experiencing in the field, particularly with respect to trends in new set top box shipments and deployment of advanced digital TV sets.
With that, I am going to turn the call over to Shum, who will review in detail our third quarter results and our full year outlook. Shum?
Shum Mukherjee
Thank you, Ben, and good afternoon everyone. As Mark mentioned, we have posted a few slides on our website that provides some historical perspective to our performance. And I will refer to those slides in a few places as I discuss our results.
Billing in Q3 2008 were $26.7 million, up 5% over Q3 of ’07, reflecting a $0.8 million or 4% increase in Middleware billings and a $0.5 million or 18% increase in billings in the Advertising segment.
Slides two and three of the supplemental presentation highlight the steady growth we have achieved in total digital device shipments as well as the recent growth in PVR shipments. We think this growth is indicative of our expanding global customer base as well as the increasing demand for new and advanced services.
In the Americas region, billing were up 4% or $0.2 million, reflecting increased billing to NET in Brazil and Star Choice in Canada, partially offset by reduced billing to EchoStar.
Billings in our EMEA region were up $1.2 million or 10%, reflecting increased billings to UGC and Numericable, France. Middleware billings in the Asia Pacific region were down $0.7 million or 11% primarily reflecting reduced billings to J:COM in Japan where last year we had large billings in Q3 of ’07 related to professional services to launch their VOD service.
Moving to the Advertising Solutions segment, billings were up $0.5 million or 18% primarily reflecting increased billings to Comcast for our EclipsePlus advertising campaign management system.
Year-to-date total billings was $94.2 million, up 16% from the same period in 2007 with the Middleware segment up 15% and the Advertising segment up 28% year-to-date compared to 2007.
Now, let’s turn to revenues and I refer you to Slide four of our supplemental presentation for historical perspective. Revenues in Q3 2008 were $26.9 million, up 14% over Q3 2007. Revenues in the Middleware segment were $23.9 million, up 15% from Q3 2007, primarily reflecting increased business from Sky Italia, NCA, and UGC, partially offset by reductions in revenues from EchoStar and J:COM.
Revenues in the Advertising segment were $3 million, flat compared to Q3 2007.
Revenues through the first nine months of 2008 were $87.5 million, up 22% from the same period in 2007 with Middleware revenues up 24% and advertising revenues up 10%. Deferred revenue at the end of Q3 2008 was $30.5 million compared to deferred revenue of $24.1 million at the end of 2007, primarily reflecting increased billings to DishTV India, and Time Warner Cable that are not yet recognizable as revenues.
Adjusted EBITDA before unusual items in Q3 2008 was $3.7 million compared to a loss of $3.3 million in Q3 2007, primarily reflecting higher revenues and improved trends in our level of expenses. Also, Q3 2007 included an accrual for severance related to senior executives.
Contribution margin in the Middleware segment was $9.2 million, up $4.8 million from Q3 ’07 on a revenue increase of $3.2 million. Contribution margin in the Advertising Solutions segment was a loss of $0.1 million, flat compared to Q3 2007.
Adjusted EBITDA for the first nine months of 2008 was $13.7 million compared to a loss of $3.9 million in the same period of 2007, reflecting increases in contribution margin of $15.3 million in the Middleware segment on a revenue increase of $14.9 million and increased contribution margin of $1.8 million in the Advertising segment on a revenue increase of $0.9 million.
Net income in Q3 2008 was $1 million compared to a loss of $4.8 million from continuing operations in Q3 2007. Net income in the first nine months of 2008 was $7.3 million compared to a loss of $12.6 million from continuing operations in the first nine months of 2007.
Our balance sheet and financial position remains strong. Our cash portfolio as of September 30, 2008 was $98.7 million compared to $81.8 million on December 31, 2007. Our cash balance was negatively impacted during the quarter by foreign exchange movements and would have been $100 million based on exchange rates effective June 30, 2008.
Cash generated from operations was $0.3 million for Q3 2008 and $5.4 million for the first nine months of 2008 compared to cash used in operations of $1.6 million in Q3 ’07 and cash generated from operations of $2.8 million in the first nine months of 2007.
As Slide five in the supplemental presentation illustrates we have increased our cash generation capabilities since the beginning of 2007 due to the combination of increased revenues, the elimination of non-core businesses, and a more efficient cost structure.
Just a quick comment on our accounts receivable. We showed an accounts receivable balance of $27.5 million at September 30, 2008. In early October we collected approximately $5 million of those receivables and our receivable balance as of October 31, 2008, was approximately $22.5 million.
I’d also like to briefly comment on our recent acquisition of Ruzz TV, which as Ben noted, was a small acquisition. It had a purchase price of $0.2 million excluding earn-outs. We expect Ruzz TV will generate approximately $2 million in revenue in 2009 and operate at breakeven to slightly positive income.
Now, moving to guidance, given the potential for current worldwide economic conditions to impact our customers’ spending decisions we are narrowing our guidance for full year billings to $122 million to $125 million. We are now guiding towards full year 2008 GAAP revenues to $110 million to $115 million. In terms of net income, I am pleased to say that we expect to end the year with positive net income.
I’d like to remind listeners that our Q4 2007 revenues were positively impacted by the recognition of $10.5 million of previously deferred revenue from UGC during that quarter. For Q4 2008, we do not expect any similar movements of this magnitude in our deferred revenue.
I will now like to hand the call back to Ben who would give some concluding remarks.
Ben Bennett
Thanks, Shum. So, looking ahead to 2009, I’d like to say we are in constant discussion with our customers and partners regarding their future roll out plans. Despite the current global economic environment, we believe we are well positioned to weather the expected downturn. The Company is beginning, as you have seen, to execute much better operationally. We are advancing on some new technologies and new market segments.
And probably importantly, we are fundamentally healthy from a balance sheet perspective. These are important attributes in the economic climate and we will look to be opportunistic with our business going forward. Our Company strategy will be to continue investing in our core technologies and people in addition to hitting our growth and profitability goals. This approach will ultimately maximize our shareholder return.
We expect to provide 2009 guidance when we report our fourth quarter results and benefit from a little further insight into the general economic trends over the next few months.
With that, Shum, Mark, and I will now be pleased to answer some questions. Operator?
Question-and-Answer Session
Operator
(Operator instructions) And your first question comes from the line of Ali Mogharabi from B. Riley. You may proceed.
Ali Mogharabi – B. Riley
Hi guys. Good quarter. Ben, I will try this again. You touched on ’09 a little bit, but just wanted to know if you can provide some more color in terms of how the current environment is or maybe impacting you guys and whether we should expect any top line growth during the year?
Ben Bennett
Hi, Ali. Hope things are well.
Ali Mogharabi – B. Riley
Okay.
Ben Bennett
I can't give any detailed guidance, not at this particular point of time. We discuss this with the Board and I am sure you are aware. I mean this market is pretty volatile. I mean I think all I can say is I’ve been through a couple of recessions. I think the Company is better, much better positioned to handle this one that it was in 2006. I think we’ve got healthy focus, which wasn’t always the case in the past on core businesses. I think we have a financial situation, which compared to a lot of these smaller startup companies is healthy in terms of cash, positive net income, which I look to sustain and of course – and a pretty healthy balance sheet with no debt. So, I am cautiously optimistic. Having said that, we are pretty vigilant in talking to our customers and our partners and making sure that we have a pretty definitive outlook. But all I can say is I think we are pretty well positioned, much better than the Company was in previous times and it’s not the intention to stand still. I think what’s happened to technology companies in the past during a recession is (inaudible) shut shop. We do have to control those costs, but I think we have a team here that’s shown that in the past. We are going to continue to invest in the roadmap. That’s key because this downslide will end and I think the U.S. will be one of the first to come out of it. I am not sure how long or deep this is going to be, but it is important that this Company continues to invest in technology and its people.
Ali Mogharabi – B. Riley
Well, regarding your clients and as you are in touch with those guys, of course discussing what they are planning on doing, next year and after that, I mean overall does it sound like they are planning on reducing their CapEx, does it sound like they are planning on maybe abandoning or just pushing back certain projects? Just trying to get a better idea of the overall attitude that you are seeing out there.
Ben Bennett
(inaudible) in the U.S. advertising market. You are probably seeing in the U.S. (inaudible) there has been a lot of fall out and redundancies. We shouldn’t kid ourselves. I mean that’s going to be a tough market post the elections when there is a lot of activity in terms of political ads. So, that’s one area where I do think it’s going to be a hard 12 months waiting months. I am talking to some of our set top box partners. It depends. There is – I think Pace announced their – I was talking Neil Gaydon, COO of Pace yesterday and (inaudible) announced their earnings and their outlook for 2009 and it’s not – it’s pretty – not a fantastic growth, but is reasonable growth. And these guys, they have long lead times. So, it’s not something that’s one or two months. They have bill of materials. There is other partners that will struggle I say. There are a few startup companies that are going to struggle in the next 12 months. But overall I think you just got to be prudent here. I mean this downturn really took a dive last six weeks. So, we are looking closely at the reports coming in and we are also talking to our customers, but I am pretty confident that we are well positioned to weather this economic downturn.
Ali Mogharabi – B. Riley
Now, of course, Ben. At the same time, your guys are continuing to work on their current project from which revenues can – I am assuming – will likely be recognized some time during next year, correct, certainly given the current deferred revenue balance that we are seeing?
Ben Bennett
Yes, absolutely. You know our business is long lead times. So, when you look at a lot of professional services work, I don’t want to be a professional services company. We are a product company and innovative product company. But when you have a lot services work going on it means you are working on a lot of projects that ultimately lead to downstream royalty revenues. Now, some of the – some customers will cut back on their projects that I am sure of. And it depends if you’ve got – you have to use on and off. Digital TV is it recession proof? It has proved to be in the past. You have to be careful with new set top box, new sort of the HD DVR platforms that are high end. And also there is some – if you look at the emerging markets area. Generally speaking, we haven’t yet seen that downturn, but we have to be prudent. But I think the good news that we felt – have seen in place and was shown to manage our costs. So I feel relatively comfortable but again a good definitive guidance in Q4 earnings call.
Ali Mogharabi – B. Riley
Okay. And then a couple of more questions. The – I think you mentioned you extended your agreement with Dish. Was that recently?
Ben Bennett
Yes, I think it was September.
Shum Mukherjee
Yes.
Ben Bennett
September ’09.
Ali Mogharabi – B. Riley
Okay. And it’s basically for another 12 months.
Ben Bennett
Correct.
Ali Mogharabi – B. Riley
Okay. Are you guys in the process of maybe discussing more of a long-term type of agreement similar to what you had initially signed? I mean is that still going on or is it going to be short term such as six to 12 months as it is now?
Ben Bennett
I think for the moment it will be 12 months, but we are in discussions with EchoStar and I think we can do more with that account. So, that’s a high priority for the Company, I mean I reiterate. North American market for OpenTV is important.
Ali Mogharabi – B. Riley
Yes. Makes sense. And then last question, just overall from a high level standpoint, Ben, can you give us an idea actually if Paul is also there, but can you give us an idea on how far Canoe has progressed and if it does seem realistic that we will see basically a standardized platform from those guys hopefully some time next year?
Ben Bennett
I am sorry, I don’t want to be evasive, but I just can't comment on what Canoe are up to. I mean I will say we have had discussions with some of the guys in Canoe, but I really must not comment on their business plans and their outlook.
Ali Mogharabi – B. Riley
Got you. Understand. Thanks.
Ben Bennett
I mean I don’t – I think the – regardless of that economic downturn, it’s absolutely essential that the U.S. cable market comes up with solutions for addressable advertising.
Ali Mogharabi – B. Riley
Yes. I mean I actually I view this downturn as an opportunity. So – alright I appreciate it. Thanks, Ben.
Ben Bennett
Okay. See you then.
Operator
(Operator instructions) Your next question comes from the line of Todd Mitchell from Kaufman Brothers. You may proceed.
Todd Mitchell – Kaufman Brothers
All my questions have been asked. Thank you.
Ben Bennett
Hey, Todd. Thanks a lot.
Operator
And we have no further questions in queue. I would now like to turn it over to Mr. Ben Bennett for closing remarks.
Ben Bennett
Okay. Well, thank you everyone for your time and for listening and we look forward to seeing you and listening to you on attending the Q4 earnings call. Thanks very much.
Operator
Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect and have a wonderful day.
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