OpenTV Corporation Q4 2008 Earnings Call Transcript

OpenTV Corporation (OPTV)

Q4 2008 Earnings Call Transcript

February 25, 2009 8:00 am ET

Executives

Mark Beariault – General Counsel

Ben Bennett – CEO

Shum Mukherjee – CFO

Analysts

Todd Mitchell – Kaufman Brothers

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the OpenTV Corporation fourth quarter 2008 earnings conference call. My name is Mary and I will be your coordinator for today. At this time, all the 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 would now like to turn the presentation over to your host for today’s call, Mr. Mark Beariault, General Counsel. Please proceed, sir.

Mark Beariault

Thank you, Mary. Before we begin today, please note that we have made available a short presentation in PDF format containing financial information about OPTV that members of management may refer to on this call. I invite you now to view the presentation by visiting the Investor Relations page of our Web site located at www.optv.com.

Also, I would remind you that during this call, members of OPTV’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 product, our ability to expand our product offerings, our ability to maintain the momentum in our future growth, and to achieve (inaudible) net income, and our financial guidance for 2009 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, any updates to those risk factors contained in our quarterly report on Form 10-Q, and the other documents that we file from time to time with the SEC. Those documents and reports can be viewed on the Investor Relations page of our Web site. We undertake no obligation to update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise.

During this call, we will also refer to certain non-US GAAP financial measures, such as adjusted EBITDA billings, which management believes are helpful in understanding our business and performance. We’ve included a reconciliation of those measures to US GAAP measures in the financial materials posted on the Investor Relations page. And we’ll also make available a webcast replay of this conference call on our Web site. With that, I will turn the call over to Ben Bennett, Chief Executive Officer of OpenTV.

Ben Bennett

Thank you, Mark, and good morning to everyone. I’m pleased to report today that OpenTV delivered revenues of $28.9 million and net income of $2.3 million for the fourth quarter of 2008. These results brought to a close a successful year at OpenTV.

2008 marked the first profitable year in the company’s history. This is a key milestone for our shareholders, customers, and staff, and we fully intend to build on this success moving forward. Despite a difficult economy, our financial results for the year were solid, exceeding both our revenue and net income guidance. We were able to achieve these results by improving service delivery to our customers and building a more operating efficient structure.

Billings for 2008 were $123 million [ph], representing a growth of 14% over 2007, and revenue increased approximately 6% to $170 million. In addition, we’ve successfully converted this growth into bottom line returns, demonstrating that as we grow, our business model can scale [ph].

Net income from continuing operations improved to $9.6 million in 2008, compared to a loss of $5.2 million in 2007 and a loss of $10.8 million in 2006.

We also continue to generate strong positive operating cash flow of over $14 million. And today, maintain a strong balance sheet with almost $103 million in cash and cash equivalents and no debts.

Shum will provide additional details in the financials in a few minutes, but let me say that the OpenTV team and I are proud of these results and the progress that we have made with our products and business processes. In particular, we exceeded our profitability goals, which as many listeners will recall, were the fundamental goal that we set for the company, and one, which was a major milestone for our shareholders. Our work is not done, but we believe we have a solid foundation for which to grow the business.

We continue to make good progress in our efforts to expand into emerging markets in 2008 to secure some strategic wins in mature pay TV markets such as Western Europe and Japan.

As Mark mentioned, we posted a few slides in our Web site that lend some historical perspective to our performance and where we are today. Slides two and three of that presentation highlights the steady growth we have achieved in total digital device shipments as well as the growth of PVR shipments.

In 2008, over 20.6 million OpenTV software enabled digital devices were shipped, bringing the total shipped to date worldwide to over 121 million. Of these devices shipped in 2008, 2.7 million were PVR enabled devices, which represents about 56% increase over 2007, and brings to total OpenTV’s PVR enabled devices to just over 7 million to date.

The worldwide shift from analog to digital TV is good news for OpenTV’s business. The more homes that convert worldwide, the better the opportunity for OpenTV to market its range of software products with device based middleware, enhanced interactive services, and enterprise solutions such as advanced advertising.

We’re confident that the amount of digital TV and advanced services will continue to grow for the foreseeable future. Although in light of the economic conditions, we are forecasting a slightly reduced pace of growth in 2009. With these metrics into better perspective, here are middleware’s successes we’ve achieved in 2008.

In Asia Pacific, we began work with SKY Perfect TV, Japan’s largest pay TV operator. We commercially launched our Core 2 HD PVR enabled set-top box with FOXTEL, Australia’s largest pay TV operator. And to support our activities in the region, we expanded our operations in Tokyo, Japan to accommodate local integration and sales support teams. We are also setting our Beijing, China operations, expanding into a larger facility, focused on engineering and QA. We remain active in emerging markets like South America, where we launched Net Brazil last year; and India, where we recently opened a new office in Mumbai and appointed a general manager to oversee expansion in the region and support key customers including, DishTV and WWIL of Essel Group, Big TV of Reliance Communications, and Sun TV Direct.

In the more developed markets, we were successful in extending our relationships with some key customers in 2008. This success was due in part to the advances that the team has made both in our product (inaudible) and customer support and delivery. And example of this include long time customers who extended their relationship with us last year, such as MCA in South Africa and Europe based UPC, and also new and exciting projects with some hybrid operators such as Portugal Telecom.

During 2008, we also made some significant progress with the adoption of our advanced advertising solutions. Let me highlight a few of those achievements to you today. We’ve successfully launched EclipsePlus, our latest campaign management platform for cable ad sales operators. Comcast has deployed its products in five key markets representing nearly 10 million subscribers. Time Warner has agreed to install our EclipsePlus solutions in five regional operating centers, representing 10.5 million subscribers. And we continue good discussions with them on further deployment.

We have also seen increased adoption by other US MSOs, including (inaudible) Cablevision, Charter, and Midcontinent Communications. Our campaign management solution now delivers spot advertising to more than 28.5 million cable subscribers in the US, representing approximately 45% of that local cable market.

I have to say I’m pleased with the close working relations that we have developed with our US cable customers, particularly during this difficult economic period for the TV advertising industry as a whole. I can’t stress how important it is for US companies, such as OpenTV, to continue development of new and advanced (inaudible) for our products during this economic downturn. Of course, it’s a fine balancing act. Because the company that can afford to sustain their R&D efforts will be well positioned to win further market share once this downturn cycle reverses. We aim to be one of those companies.

With the latest developments in our middleware platform, our solutions will offer increase value to our customers to help them reclaim and grow their subscriber base. In the future, we expect to support advance user (inaudible) that will, for example, logically group media content and enable viewers to rapidly (inaudible) the content to multiple sources. In addition, users are increasingly creating their own personal content, including digital pictures, movies, and music, and our media sharing solutions will extend a navigation capabilities of the set-top box beyond pay TV content.

As a Silicon Valley company, we are keenly aware of the impact of the Internet on the digital TV space. And we are making critical investments around the TV-Web convergence to fully embrace this opportunity and to help our customers bring niche long content from the Internet into the living room.

So looking forward to 2009, our strategy will be to continue to innovate and invest in our key product roadmap with an – with an additional emphasis on embracing areas such as TV and Web Convergence; Broadband enabled set-top boxes and TV; the adoption of open standards; digital TV advertising; and, of course, the enablement of advanced interactive services for our consumers.

Although the economic climate may have a dampening effect on the rate of digital TV expansion in the short term, we continue to believe good opportunities exist, and we’re confident of the long term market trend. We will continue to market and sell our products in both mature and emerging pay TV markets, particularly, India, Latin America, China, and Eastern Europe.

In addition to our traditional cable and satellite pay TV markets, we are also exploring possible opportunities for our technology and services in new vertical markets, such as telecommunications and digital threshold. I will say that all of these efforts will be executed under the goal of sustaining positive cash flow and profitability, which, although challenging given the current market conditions, is absolutely achievable. And the OpenTV management team remains fully committed to it.

In closing, 2008 was a solid year as we successfully executed on our strategy and delivered on our promise to our shareholders of improved financial performance. We operate in a global, digital TV market that continues to grow. Our efforts these past few years to build a solid financial foundation of OpenTV positions us well to weather this economic climate and allow us continue to make critical investments in our technologies. We have a lot of work to do, but I remain confident that the strategy will help the company gain market share and fuel our long term growth.

With those comments, I’m going to hand the call over to Shum, who will discuss the quarter and year-end results in a little more detail. Shum?

Shum Mukherjee

Thank you, Ben, and good morning, everyone. Billings in Q4 2008 were $29.1 million, up 4% over Q4 2007, reflecting a $1.8 million or 7% increase in middleware billings, partially offset by a reduction of $500,000 in billings in the advertising segment. In the Americas region, billings were down by $1 million or 23%, primarily due to a late royalty report. We recently received this report, so the associated royalties will be reflected in our Q1 ’09 billings and revenue. Billings in our EMEA region were down $900,000 or 6%, primarily reflecting lower set-top box shipments to UPC as compared with Q4 of 2007. This was partially offset by increased billings of $1.6 million to MCA and Africa, $660,000 to Portugal Telecom, and $543,000 to Sky Italia. Middleware billings in the Asia-Pacific region were up $3.1 million or 49%, compared to Q4 of 2007, primarily reflecting increased billings of $2.2 million to Reliance in India.

Revenues in Q4 2008 were $28.9 million, down 24%, compared to Q4 2007, which included the effect of the movement of $10.5 million from deferred revenue to revenue as a result of completion of deliverables to UPC. Revenues in the middleware segment were $25.7 million, down 27% from Q4 2007. And revenues in the advertising segment were $3.3 million, up 3% compared to Q4 2007.

Adjusted EBITDA before unusual items in Q4 2008 was $3.9 million, compared to $12.1 million in Q4 2007, primarily reflecting lower revenues. But this was partially offset by improved trends in our level of expenses. Net income in Q4 2008 was $2.3 million, $0.02 per diluted share, compared to $11 million or $0.08 diluted share in Q4 2007.

Full year billings were $123 million, up $14.5 million or 14% over 2007, reflecting gains of 12% and 20%, respectively, from our middleware and advertising product lines. Full year 2008 revenues of $116.5 million exceeded our guidance for 2008. Full year revenue increased $6.5 million or 6% over 2007 full year revenues, reflecting gains of 6% and 8%, respectively, from our middleware and advertising segments.

Adjusted EBITDA before unusual items for 2008 was $17.6 million, compared to $8.3 million in the same period of 2007. Reflecting increases in contribution margin of $8.7 million in the middleware segment on a revenue increase of $5.5 million, and increased contribution margin of $1.4 million in the advertising segment on a revenue increase of $1 million.

Slides seven to nine in the presentation posted on our Web site provides segment information and a reconciliation of contribution margin and adjusted EBITDA to net income.

As Ben mentioned earlier, 2008 marks the company’s first year of profitability. Full year net income was $9.6 million, compared to a loss of $5.2 million in 2007. Our results were driven by the successful execution of several profitability initiatives implemented over the last few years, including eliminating unprofitable product lines; initiating process improvement programs to improve quality, expedite delivery, and enhance customer satisfaction; rationalizing our overhead structure; balancing new headcount additions between US, Europe, and Asia to achieve a more productive and more cost efficient employee base; and, implementing cost control initiatives and stronger discipline in discretionary expenses, which resulted in cost savings for the year of 7%.

Our balance sheet and financial position remains strong, as of December 31, 2008, our cash portfolio was $102.8 million, compared to $81.8 million on December 31, 2007. Cash generated from continuing operations was $14.2 million for full year 2008, compared to cash of $16.2 million for full year 2007.

Deferred revenue at year-end 2008 was $33.2 million, compared to deferred revenue of $24.1 million at year-end 2007. Slide 10 of the presentation demonstrates the growth of our cash position over the last few years.

Looking ahead into 2009, given the current worldwide economic climate and the potential for this to impact our customers spending decisions, we are anticipating a slight decline in set-top box shipments. Based on this, we are guiding to billings of $125 million to $135 million, and full year GAAP revenues of $117 million to $123 million.

As Ben indicated, we believe we are in a veritably strong competitive position, and we will use this opportunity to continue investing in process improvements and product development. Despite these planned expenses, we still expect to be profitable on the net income level for full year 2009. We are continuously monitoring the impact that the current economic environment may have on our customers and our business. Having achieved profitability, we aim to maintain it so we have careful cost control measures in place and the ability to reduce costs further, if needed.

I’d now like to hand the call back to Ben who’ll give some concluding remarks.

Ben Bennett

Thank you, Shum. We have a cautionary optimistic outlook for OpenTv in 2009. Clearly, the economic environment has deteriorated significantly. And that could impact our performance if network operators begin to slow set-top box orders and service deployments.

Although our visibility into the business is fairly stable at the moment and we believe that the initiatives we have implemented to streamline our operations, our technology strategy, and strong balance sheet, thus position us well in this challenging market.

And with that, Shum, Mark, and I will be pleased to answer your questions. Operator?

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from the line of Todd Mitchell, Kaufman Brothers.

Todd Mitchell – Kaufman Brothers

Good morning. I guess I’m going to say, (inaudible) great results, but it’s nice to see a good solid quarter in this environment. That’s what I wanted to ask you about. In terms of you’re looking forward, I know you guys have spent a lot of time visiting clients recently. And you’re saying here that you’re looking for ship – set-top ship box – set-top box shipments to be down year-over-year. Can you kind of characterize it a little bit more granularly in terms of looking out at – versus where you thought you would be about six months ago? Is the pull back in existing businesses? Is it in new products for existing customers? Or is it in green fields? And could you also talk about, is it in the developing markets or is developed markets?

Ben Bennett

Yes. Hi, Todd. This is Ben. I hope things are well. The guidance is mostly on existing customers. So it’s a conservative view. As you all know, there’s some price spots still there even in this global economy. Places (inaudible) continue to grow, but some of the existing customers will be pulling back a little bit. So it’s a – our guidance is – given this climate long term, we’re just being a little bit cautiously optimistic. But it’s mostly in the existing customers. And I think I should mention that it’s about, I think, another 5% year-over-year, roughly.

Todd Mitchell – Kaufman Brothers

And how does the environment relate to new RFP [ph] activity?

Ben Bennett

Let’s say, and again, this is a guesstimate. I mean I’ve spoken to a number of customers. I can see they operate from both the legacy platforms and the thinner set-top boxes. But also now ever increasing numbers in HD and more advanced set-tops, et cetera. So in the advanced set-tops, we could see a slight slowdown in those boxes. And that just logic compared to what’s happening in the market.

We’re not seeing people retrenched from digital TV, but they may be delaying those decisions on buying that upgraded HD DVR, particularly in some of the – in the UK, some of the more mature pay TV markets. We don’t have that spend in some of the more emerging markets where they’re going with more of these Apple [ph] boxes, which is still a strong business. Overall, I don’t see a big degradation in that digital TV rollout, but I think all companies need to be a little bit cautious.

Todd Mitchell – Kaufman Brothers

Okay. That’s helpful. And one more question, moving over to the advertising side of this business. One of the things that all of us have been trying to get our arms around is just exactly what is Canoe? I think that you’ve made some progress here with the EclipsePlus platform and new innovation, added new features and functionality.

Can you sort of talk to us within the context of, one, what you know, and one [ph], what you’re able to talk about? What’s going on at Canoe? And they’ve made some public announcements about some sort of new features that they’re going to make available to advertisers. How does that pertain to you? Does it at all? Does it pertain to the Eclipse platform and the functionality there? Have they asked for new functionality down the road that is implicit in what they’re doing? And is that the opportunity here for OpenTv? Or is it something else further up field, so to speak?

Ben Bennett

Okay.

Todd Mitchell – Kaufman Brothers

I know that’s a lot. I apologize.

Ben Bennett

Yes. I’ll make two points. So the first is, I think I’ve said in the script, time plays particularly in this climate of the progress that our teams have made and Paul has made with the advanced advertising in the US cable environment in particular. EclipsePlus is being adopted both at Comcast and Time Warner, but also other major NSOs. So I think we’re making some pretty good progress, starting around that campaign management tour.

As it pertains to Canoe, I have to be a little bit careful because I don’t want to make comments. But we are actively discussing with Canoe managements. And that will be around products such as campaign management, and indeed some backing components that we’re going to help – that we would like to help them with around things like cable [ph] and participation TV, which is our product. Back-to-back, as much as I can say, Todd, I don’t want to get too far ahead at this particular point other than we are actively courting the cable guy – Canoe guys.

Todd Mitchell – Kaufman Brothers

Okay. Thank you very much.

Operator

(Operator instructions) We’ll wait a moment to see if there are any other questions. Sir, you have no other questions at this time. I would like to turn the call over to Mr. Ben Bennett for closing remarks.

Ben Bennett

Thank you, operator. Again, we have a pretty good solid year in 2008. And we’re looking forward to 2009. Difficult climate, but I think we’re pretty well positioned. So thank you all to our shareholders and the staff for the excellent work they’ve done. And I look forward to the next conference call after our Q1 report.

Operator

Thank you for your participation in today’s conference. This concludes the presentation, and you may now disconnect. Have a good day.

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