OpenTV Corp. Q2 2009 Earnings Call Transcript

OpenTV Corp. (OPTV)

Q2 2009 Earnings Call

August 06, 2009, 5:00 pm ET

Executives

Ben Bennett - Chief Executive Officer

Shum Mukherjee - Chief Financial Officer

Mark Beariault - General Counsel

Analysts

Todd Mitchell - Kaufman Brothers

Presentation

Operator

Good day, ladies and gentlemen and welcome to the OpenTV Corporation second quarter 2009, earnings conference call. My name is Mary and I’ll be your coordinator for today. At this time, all participants are in a listen-only mode. We’ll be facilitating a question-and-answer session towards the end of the conference. (Operator Instructions)

I would now like to turn the presentation over to your host for today’s call, Mr. Mark Beariault, General Counsel. Please proceed.

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 OpenTV that members of management may refer to on this call. I invite you to view the presentation by visiting the Investor Relations page of our website located at www.optv.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, maintain the momentum in our revenue growth, and to achieve positive 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 and any updates to those risk factors contained in our Quarterly Reports 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 website. 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 be referring to adjusted EBITDA and billings, which our non-US GAAP financial measures that 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. We’ll make available a webcast replay of the conference call on our website.

With that, I will now turn the call over to Ben Bennett, the Chief Executive Officer of OpenTV.

Ben Bennett

Thank you, Mark and good afternoon everyone welcome to OpenTV’s second quarter 2009 conference call. I would like to begin today’s call with a quick summary of our Q2 financial results. In second quarter, OpenTV generated billings of $29.8 billion and revenues of $27.6 million.

Net income was positive $1.7 million and we ended the quarter with a balance of $111 million of cash, cash equivalents and marketable debt securities. Given the current economic climate, we’re satisfied with the operating results and we provide the foundations for the company’s future.

Before getting into some company highlights for the second quarter, let me make a few statements about our industry in general. We continue to see resilience from strength in the pay TV markets worldwide, which sets off shipments maintained in that positive momentum and demand for advance television services increasing.

The key reason for this trend is the notable increase in competition between traditional network operators and new distribution channels, such as the IPTV, DTT and to a lesser extent, the top providers. In addition, analogue to digital conversion worldwide continues at a significant pace, particularly in emerging markets.

Of course, the relative strength of the pay TV market down attracts heightened competition and we are seeing that surface in certain markets around the world. This is to be expected, though and to counter the threats; we will continue investing aggressively in product R&D, customer support and technical innovation, which I will discuss in a little more detail shortly.

Turning to metrics concerning OpenTV’s recent performance we posted the slide presentation on our website today that provides some historical perspective. Slide three and four that presentation highlights the steady growth we have achieved in the total digital device shipment, as well as the growth in our PVR shipments. In Q2 $5.9 OpenTV enable digital device were shipped, bringing the total ship-to-date worldwide to over $133 million.

Of the devices shipped in Q2, $1.2 million were PVR enabled devices, which represents an approximate 147% increase over the second quarter of 2008 and brings the total OpenTV PVR enabled devices shipped to over $9.9 million to date. I want to stretch that this is a key metrics, as these more future it set-top box provide an excellent platform for up selling OpenTV’s value-added services and products.

On the advanced advertising side of our business, we continue to make good progress in the US cable market. I am pleased to report today that Charter Communications, fourth largest USO and one of our current customers for EclipsePlus is awarded OpenTV a single-source deal for EclipsePlus.

Under our agreement, the Charter Southeast division will be added to our current footprint. All told, our EclipsePlus management campaign management product now serves 55% of subscribers in the local advertising enabled US cable market. Having said that, we do see some short term softening in the US advertising market in general, primarily as a result of the recession where a drop in TV ad revenues in key areas such as automobile advertising is impacting downstream technology decisions.

However, long term, the fundamental need for advanced TV advertising solutions remains very strong. Let’s have a few words about some of our product development initiatives. Innovations critical to OpenTV’s long term growth strategy and we’re actually the committed to investing in our world maps With our strong balance sheet, we believe we can support these commitments better than many of our competitors, particularly in these economic climate where I’m seeing many cutbacks or investments being deferred.

R&D spend over the last few years has been consistently around 30% of revenues compared to a software industry average of about 26% of revenues. We have been able to achieve this level of investment while also improving bottom line performance. Our strategy is to continue investing in our R&D headcount for the reminder of 2009 and take an advantage of the availability of some really excellent and well qualified talent worldwide.

A portion of the hiring activity is in China where we continue to build a strong operation and that will be critical for the long term positioning of the company. I’m confident that these debts will pay dividends for the company in the long term. Stand with our road map, the key drivers of the performance, time to market, next generation devices and intuitive user experience.

This area offers tremendous opportunity as we focus in the next generation of our core Middleware platform as well as solutions enterprise over the top content, IPTV, DTT and advanced advertising. Later this year, we will be showcasing, starting with Sky Perfect in Japan, some of the innovations that we’re working on and which will be included in our next major Middleware release, OpenTV Core 2.2.

Some of the innovations include integrated TV search these technology to enable subscribers to easily search and watch content from multiple sources and enhanced PVR, a technology which will allow subscribers high reliability PVP capabilities as well as the new enhance futures that go beyond today’s traditional PVR experience.

Home networking, this is an area that is really long been talked about and until recently, only being each requirement. OpenTV will deploy a DRNA base solution that will enable subscribers to distribute and watch content from multiple sources and devices within the home and particularly excited about our innovative efforts in this area, but don’t be flashed when that’ll be supported by our Middleware, which will enable Flash developers throughout the world to create the graphically rich television application environment.

One final area I want to highlight is hybrid on demand. This is a key technology for our operator customers because it will enable them to supply on-demand content to subscribers, using a variety of delivery mechanisms, including push, pull ward and progressive downward.

So, overall, we maintained leadership positions in our markets. We look forward to making key product announcements at the upcoming IBC trade show in Amsterdam this September, particularly as it relates to our next generation technologies.

We approach this event as a global showcase for OpenTV and the team has some really exciting and innovative solutions that they will be demonstrating under the theme, what is next in television. Let me take a few moments to provide some regal highlights for the quarter. In May, the region continues to see moments to provide some regional highlights for the quarter.

Our EMEA region continues to see some new opportunities and represents 52% of our Q2 revenue. We’re excited to have commercially launched OpenTV PVR two those news cable operator. We also continue to work very closely with key customers in this region such as BSkyB, UPC, multichoice SouthAfrica and Sky Italia.

The Asia Pacific region continues to generate solid growth for OpenTV, particularly the analogue to digital TV conversion as it grows. So, region accounts between 22% of the Q2 revenues. In China, we’re proud to announce in second quarter the launch of one of the most comprehensive digital cable offerings in China with Southern Yinshi Network Media. A subsidiary of one of China’s leading broadcasting groups.

The Americas, our revenues accounted for 26%, but we continue to enjoy strong relationships with Comcast and time Warner cable. There are very much committed to our advanced advertising campaign management solution. On the Middleware side in the Americas, our relationship with key operators in the region such as EchoStar and Net Brazil remains strong.

We’re deploying our advance core 2 for Net Brazil, Latin’s Americas highest cable operator and support then new high definition TV offering. In addition, I am excited to hat in Q3 we will be deploying our first commercial IPTV solution in the US through the partnership with Innovative Systems. Innovative Systems integrated IPTV into its turn key digital television solution for the US telecom market.

The deployments are expected to be with smaller tier 2 and tier 3 customers, I don’t want to underestimate the important’s tese launch and remains a significant last time for the company as it represents a state-of-the-art turn-key solution featuring an integrated IPTV Middleware and advanced PVR solution. In closing, second quarter was another solid quarter for OpenTV.

In closing second quarter was another solid quarter for OpenTV. We remain cautiously optimistic for the company and the key markets for the rest of year and into 2010. The management team and all of the staff of OpenTV remain focused on execution and delivering a suite of next generation products and positioning the company at the very forefront with the digital TV industry.

Now, before I hand over Shum, I want one-third of coming regarding the recent proposal by the Kudelski Group, which is our investor known was not ratified by the special committee of the board of investors. I know many investors wonder what that means of OpenTV’s relationship with this control and share holder, particularly given some of the public comments that will made after the special committee’s decision.

What I can say to you today is that management’s focus was always and will be always to run the business as efficiently as possible and ensure the company continues to fire on all cylinders, particularly around product development and customer support. The company’s been making significant investments in the business and we will continue to work with our board around the levels of both organic investment as well as potential, strategic transactions.

As for the Kudelski relationship as a whole, I want to reiterate that these remains strong. We continue to work closely with Kudelski companies with which we have significant joint interest such as, joint customers and common competitors.

We believe this strategy is in the best interest of all our shareholders and we wish to see this relationship flourish. I can assure you that the OpenTV board and management team are fully committed to the long term growth and strength of OpenTV and we continue to work effectively on a day-by-day basis.

There is no question that there are challenges ahead, but to be frank, we thrive on challenges and the company’s well positioned in what is an exciting and growing worldwide digital TV market.

With that, I’m going to hand over the call to Shum, our CFO. Shum.

Shum Mukherjee

Thank you, Ben and good afternoon everyone. Billings in Q2 2009 were $29.8 million, down 300,000 compared to Q2, 2008, primarily reflecting a $1.4 million reduction in billings, from our advertising segment. Billings in the middleware segment were $27.4 million, $1.5 million higher than Q2, ‘08, primarily reflecting increased billings to UGC TV Cabo and Portugal Telecom partially offset by the lower billings to Reliance in India.

Billings in the advertising segment were $2.4 million in Q2 2009, $1.4million below billings in Q2, 2008, primarily reflecting a shift in our pricing model for our EclipsePlus product towards an upfront license fee model. Revenues in Q2 ‘09 were $27.6 million, up 800,000 from revenues of $26.8 million in Q2 ’08, reflecting an increase in $1.3 million in middleware segment revenues and a decrease of 500,000 in advertising segment revenues.

Royalties and licenses revenues from the middleware segment were $18.8 million in Q2, 2009, up $2.1 million or 13% over revenues of $16.7 million in Q2, 2008. Reflecting higher revenues from UGC TV Cabo and Portugal Telecom partially offset by lower revenues from Reliance.

Services and other revenues from the middleware segments was $6 million, $800,000 below Q2, 2008. When we had completed and recognized revenues, on a large number of professional service contracts, including Net in Brazil and BSkyB. Revenues in the advertising segment were $2.8 million in Q2 ‘09, 500,000 below revenues of $3.3 million in Q2 2008, reflecting decrease revenues from Time Warner Cable.

Deferred revenue at the end of Q2 ‘09, was $38.7 million, compared to deferred revenue of $33.2 million at the end of 2008, primarily reflecting increased billings to Dish TV India and Foxtel that are not yet recognizable as revenues. Adjusted EBITDA before unusual items in Q2 ‘09 was $4 million, $1.5million better than in Q2 ‘08, primarily reflecting increased revenues of 800,000 and reduced amortization costs of 700,000.

Contribution margin in the middleware segment was $8.5 million, 34% of segment revenues, compared to a contribution margin of $8 million, 34% of segment revenues in Q2 of 2008. Contribution margin in the advertising segment was 200,000 in Q2 ‘09, consistent with Q2 ‘08.

Interest income in Q2, ‘09 was 100,000, compared to 600,000 in Q2, ‘08, reflecting lower interest rates on our investment portfolio, which consists of short-term debt securities issued by the U.S. Government entities and other highly rated institutions. Other income in Q2 ‘09 was an expense of 400,000, compared to a gain of 400,000 in Q2, ‘08, when we benefited from foreign exchange gains on a portion of our cash balances denominated in non-U.S. currencies.

Net income in Q2 ‘09 was $1.7 million, compared to break even net income in Q2 of 2008. Our balance sheet and financial position remain strong. Our portfolio of cash, cash equivalents and marketable debt securities as of June 30, 2009, was $111 million compared to $100 million on June 30, 2008, and $103 million on December 31, 2008.

Now moving to guidance, our guidance remains unchanged from our last earnings conference call held on May 7. We expect full year billings to be in the range of $125 million to $135 million and full year GAAP revenues to be in the range of $117 million to $123 million. As Ben mentioned, we continue to invest in process improvements and product development efforts to maintain a competitive road map, but we continue to expect to be profitable at the net income level for full year 2009.

Now, Ben, Mark and I will be pleased to answer your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Todd Mitchell - Kaufman Brothers.

Todd Mitchell - Kaufman Brothers

I have a question with regard to licensing of IPTs and the recent win with Macrovision or where had over NDS. The NDS is had indemnified to move customers in the IPT and then they had to pay up basically. Do you have any risk of that happening to you?

Ben Bennett

Well, I can tell you it’s, we’re making some investments in the middleware support and we obviously support a number of EPGs or user interfaces around the world, instant keys strategic area. In terms of agreements or a relationship with Robbie, I think it’s a little bit early to speculate on, but it’s an important area, because I see that from a convergence perspective becoming more and more important as you well know.

I think we’ll be demonstrating how our middleware supports a variety of user experiences across many additional devices at IBC other than that, I’m not sure we can comment much more on that question.

Todd Mitchell - Kaufman Brothers

Just one more question in terms of advertising you want a number of ones that eclipse faster and most notably Charter. We know Charter is working with some of the advertising agencies on advertising and providing set-top box data. My question is pretty simple. Are you providing a set-top element for Charter to do that or are you providing a set-top box element for anybody in the U.S. cable to do that?

Ben Bennett

Today not in deployment, and it’s not from a middleware perspective, but there are a couple of options for addressable advertising in the U.S. cable market, which does require a small client. That’s could be a true two way client or EBIT base client. The advertising team’s working heavily on, what we call the SCTE 130 standard. We’re doing some progs tops with cable ads and making good progress. Nothing deployed, but it’s an area we are looking at.

Todd Mitchell - Kaufman Brothers

To the best of your knowledge, is cable vision the only one that has an active set top box elements that’s actually getting used commercially?

Ben Bennett

Yes. I was up in the New York area, so today that is the case. We are aware of the Canoe initiatives and the reason I made the comment about the market is, obviously, with the advertising market somewhat depressed is going to impact downstream, but I don’t think it changes the dynamics long term, but the market or the need for addressable advertising. OpenTV’s fully committed to that area.

Todd Mitchell - Kaufman Brothers

Lastly, as long as we’re on the subject, in terms of Canoe, there seems to be an ongoing dialogue among all Canoe watchers. Are they moving forward? Are they not? Are they moving forward faster? Are they moving forward slower? Could you give us kind of your assessment from being a little bit closer observer, as to how that project is progressing?

Ben Bennett

Well, I can say we’re meeting Paul who heads up our advanced advertising group, obviously has excellent relationships that is our team. OpenTV is actively supporting. There were recent announcements with Canoe about the adjustable ad, Canoe’s did so. I think that going a little bit slower, but I think David Verklin and his crew are completely committed and I’m sure that will be successful and I’m sure OpenTV will be supporting them now and in the future.

Operator

Thank you. There are no other questions at this time. I would like to hand the call to Mr. Ben Bennett for closing remarks.

Ben Bennett

Thank you, Mary. I would like to thank everyone for their participation in today’s call. Just as a quick reminder, if any of our investors, partners or customers, obviously are that in Amsterdam for the IBC Conference, I’ll be happy to personally host you at our booth. With that, I will close the call.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: [e-mail]. Thank you!