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Executives

Mark Beariault – General Council

Ben Bennett – Chief Executive Officer

Shum Mukhergee – Chief Financial Officer

Analysts

Todd Mitchell – Kaufman Brothers

OpenTV Corp. (OPTV) Q3 2009 Earnings Call November 3, 2009 5:00 PM ET

Operator

Welcome to the Q3 2009 OpenTV Corporation earnings conference call. (Operator Instructions) I would now like to turn the conference over to your host for today’s call, Mr. Mark Beariault, General Council.

Mark Beariault

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 on 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 for 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 or the markets for our products, our ability to expand our product offerings, maintain momentum in our revenue growth and 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 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 any 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 statements whether as a result of new information, future events or otherwise.

During this call we will also be referring adjusted EBITDA and billings which are non-US GAAP financial measures that management believes are helpful in understanding our business and performance. We have included a reconciliation of those measures to U.S. GAAP measures in our financial materials posted on the investor relations page. We will also make available a webcast replay of this conference call on our website.

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

Ben Bennett

Good afternoon everyone and welcome to OpenTV’s third quarter 2009 conference call. I’d like to begin today’s call with a quick summary of our financial results. In the third quarter OpenTV generated billings of $32.6 million, revenues of $31.8 million and positive net income of $2.6 million.

We ended the quarter with a balance of $113.8 million of cash, cash equivalents and marketable debt securities. I characterize these results and solid and shows that the company continues to manage its operations effectively in what is still a difficult global marketplace.

Before getting into some highlights from the quarter, let me provide a brief statement regarding the tender offer announced by a subsidiary of Kudelski to acquire all of the OpenTV class A ordinary shares not currently owned by Kudelski.

As we have previously disclosed, OpenTV’s Board of Directors voted to remain neutral as to the offer. As such we are not expressing an opinion as to whether shareholders should accept the offer and tender their shares. Ultimately, investors must make their own investment decisions and we urge shareholders to review the Kudelski offer on Schedule 14.D9 and other filings made with the SEC.

I do want to reiterate a couple of things I’ve stressed in the past. First, regardless of what happens with this tender offer, a strong working relationship with the Kudelski group is important for the long term success of OpenTV’s business. We have significant joint interests with key customers and are closely aligned in our strategy with respect to certain competitors.

Second, during the tender process I want to stress that my management team has been and will continue to be focused on running the business as effectively as possible and stay focused on executing on our strategy.

With that, let me highlight a few metrics concerning OpenTV’s recent performance. We posted a slide presentation on our web site that provides some historical perspective. Slides three and four of that presentation highlight the steady growth we have achieved in total digital device shipments as well as the growth in PDR shipments.

In Q3, 4.9 million OpenTV enabled dish devices were shipped to customers, bringing the total number of devices shipped world wide to date to over 138 million. Of the devices shipped in Q3, just over one million were PDR enabled devices which represents approximately a 53% increase over the third quarter of 2008 and brings the total number of OpenTV PD enable devices shipped to approximately 11 million.

This is a key metric as the deployment of this platform adds to the stickiness of our technology and actual provides an opportunity to up sell OpenTV Enterprise related technology.

Let me take a moment to highlight some of the key achievements made by OpenTV during this quarter. On the product front, I’m very pleased to announce that we have recently made our latest Core 2 version Middleware product generally available in the market, and indeed our integration teams are busy in launch engagements with four key customers around the world.

This is a significant milestone because it signals the arrival of some excited next generation services and features including advance content search, enhanced on screen graphics and home networking to name but a few. This release will also serve as the foundation for our future Core 3 Middleware platform which indeed we recently announced at the IBC Trade Show in Amsterdam.

As many of our investors are aware, Middleware products are designed to simplify the process of launching everything from interactive consumer services to compelling TV user interfaces. The need for new intuitive use interfaces is becoming an increasing necessity today as they allow viewers of all demographics to sort through the bewildering amount of video content that’s now available to them.

On this topic, I’m proud to say that our Core internet user interface product recently won the best graphic and design at the 7th Annual AFDESI Award ceremony held last month in France. This kind of recognition is important for the company and our staff and we expect OpenTV’s Core NX product to be a key part of our expanded offering to our customers in the near future.

We also continue to partner with industry leaders to develop technologies for web TV conversions, a trend which is really gaining pace rapidly in the digital TV markets worldwide. In August, a consortium of European television industry leaders, including OpenTV, announced the launch of hybrid broadcast broadband TV, a major Pan European initiative aimed at enhancing and standardizing free to air broadcast content with broadband interactivity like DOD, search and real time news.

We are at the early stages of this initiative but we do envision that interactive broadband enabled TV’s will eventually supplement it’s set top box cousin in the home, and we aim to invest and leverage our experience in order to compete in this market in the future.

Now moving on to the customer front, we announced last week that we had extended our partnership with BSkyB, a long standing and important OpenTV customer. We’re very excited that Sky has engaged us on a proof of concept around next generation Core 3 Middleware and we are currently working closely with the Sky teams in the U.K. on this program and see this engagement as a roll model for some of our other key customers around the globe.

In addition, Sky has agreed to license some of our intellectual property which is another important milestone for OpenTV because it validates the importance of our intellectual property portfolio in one of the most complex and competitive digital TV markets in the world.

Our portfolio of over 700 issued patents worldwide is a valuable asset that helps us compete in the market and benefits our customers. We will indeed look selectively to explore other arrangements in the future.

We also continue to work closely with other key customers to bring new and advanced digital television solutions to market. Recently we announced together with our key partners the launch of Digital PushBox service which represents the first deployment of this advanced technology for OpenTV.

By all accounts this service has been a great success with subscribers in Turkey. In Australia, Foxtel recently announced that they are launching the next generation platform later this month. This platform is developed in close collaboration with OpenTV and continues to be powered by OpenTv Middleware.

Foxtel will be launching some exciting applications that demonstrate new ways for subscribers to discover content and make it easier. For example, to record the program they want without having to navigate through a traditional TV guide. We’re also working closely with Foxtel on coverage of the 2010 Olympics which will include a new interactive mosaic application.

Turning to our advanced advertising business, economic weakness in the global advertising market has continued to impact technology decisions by operators and we expect the effects of this impact to felt well into 2010. Notwithstanding this weakness, we continue to make good progress in the U.S. cable market with the Eclipse Plus campaign management system, and I’m pleased to announce today a new deal with Bresnan Communications that will serve approximately 200,000 subscribers with our Eclipse Plus campaign management system.

On the global front, at the recent IBC Trade Show in Amsterdam, we premiered our newest campaign management product called Eclipse. This products has been specifically developed with the international markets in mind and we are indeed seeing some interest from existing OpenTV customers.

So to sum up, overall the company continues to deliver results and not just promises. The staff and management have worked hard to achieve a solid financial foundation, something that other companies in our space have struggled with during this downturn.

However, we’re not focused on the past, but the future and we will continue to invest in the business both in developing new markets for our product and growing our overall R&D capabilities.

Of course there are some challenges ahead of us as the markets in which we operate become more competitive and we are indeed seeing that dynamic play out in both mature and emerging Pay TV markets. However, where there are challenges there are opportunities and I believe that as long as we invest in the business and execute, we will remain well positioned.

I understand that the situation around the Kudelski tender offer is complex, but I can assure you that the management team’s focus has been and will continue to be running the operations effectively and executing on a strategy that delivers long term, sustainable growth and profitability.

With that, I’m going to have over to Shum Mukhergee, our CFO.

Shum Mukhergee

Good afternoon everyone. Total billings in Q3 ’09 were $32.6 million, up $6 million or 23% compared to Q3 2008 primarily reflecting solid growth in the Middleware segment. Billings in the Middleware segment were $29.9 million, $6.1 million higher than Q3 ’08 primarily reflecting increased royalty billings to MCA in South Africa, UGC in the Netherlands and increased billings for professional services to Foxtel in Australia. Billings in the advertising segment were $2.7 million in Q3, 2009, $200,000 lower than in Q3 2008.

Revenues in Q3 ’09 were $31.8 million, up $4.9 million or 18% from revenues of $26.9 million in Q3 ’08. Royalties and license revenues from the Middleware segment were $20.1 million Q3 2009, up $5 million or 33% over revenues of $15.1 million in Q3 2008 reflecting higher revenues from MCA and UGC.

Services and other revenues from the Middleware segment were $8.8 million, approximately the same as in Q3 2008. Revenues in the advertising segment were $2.9 million in Q3 ’09, approximately the same as in Q3 2008.

Deferred revenue at the end of Q3 ’09 was $39 million compared to $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 Q3 ’09 was $4.4 million, $700,000 better than Q3 ’08 primarily reflecting increased revenues of $4.9 million that were partially offset by increases in personnel costs of $1.6 million which reflects higher headcount and increase in G&A expenses of $1.9 million primarily reflecting an accrual for sales tax exposure.

Contribution margin in the Middleware segment was $11.6 million or 40% of segment revenues compared to a contribution margin of $9.3 million or 39% of segment revenues in Q3 2008. Contribution margin in the advertising segment was $200,000 in Q3 ’09 compared to a loss of $100,000 in Q3 ’08.

Interest income in Q3 2009 was $100,000 compared to $500,000 in Q3 ’08 reflecting lower effective interest rates on our investment portfolio which consists of short term debt securities issued by U.S. government entities and other highly rated institutions.

Other income in Q3 2009 was $200,000 compared to a loss of $1.5 million in Q3 2008 when we incurred foreign exchange losses on a portion of our cash receivable balances denominated in non U.S. currencies. Net income in Q3 ’09 was $2.6 million compared to net income of $1 million in Q3 2008.

For the nine months ended September 30, 2009 revenues were $88.8 million, 1.5% above revenues generated in the corresponding period of 2008. Net income was $5.5 million compared to $7.3 million in the corresponding nine month period of 2008.

Our balance sheet and financial position remain strong. Our portfolio of cash and cash equivalents as of September 30, 2009 was $113.8 million compared to $102.8 million on December 31, 2008 and $81.8 million on December 31, 2007.

Cash generated from operations was $4 million in Q3 of ’09 compared to $300,000 in Q3 ’08.

Now moving to guidance; our guidance remains unchanged from our last earnings conference call on August 6. 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.

We continue to invest in process improvements and product development efforts to maintain the competitive road map, but we continue to expect to be profitable at the net income level for full year 2009.

And 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 was wondering if you could flush out some more information on the recent announcement with BSkyB. What does it exactly mean in terms of the licensing and the exploring the process to go to 3.0 and is there a revenue gain or revenue loss opportunity in future deployments there?

Ben Bennett

As you well know, we’ve been working closely with BSkyB over the last 12 months or so around promoting and marketing our Core 3 product. It’s an important milestone for us. This is a customer as you know we’ve been in bed with for 10 years or so, so that technology needs refreshing and this proof of concept is an important first point.

BSkyB announced a few years back the creation of their Darwin program and that has been quite significantly delayed, so the proof of concept is ongoing. It’s between our teams both in Mountainview and London and culminates as a first milestone early next year.

I can’t comment on the deployment opportunities. I think that’s just too early, but we are working with them on that.

On the IP licensing, as you well know we have quite a strong IP portfolio I’ve been keen to leverage for the benefit of our customers worldwide and certainly we’re in the company as big as BSkyB validates that intellectual property. It’s an important step.

I can’t actually comment on the value of the licensing terms. All I will say is we’re pretty pleased with the outcome on that front. I’m sure we can comment on future revenues on BSkyB. We can probably get into that when we actually give guidance, but I think it’s an important milestone in the relationship with BSkyB because there’s been some uncertainty around that customer for quite some time.

Todd Mitchell – Kaufman Brothers

Is the IP licensing, would it be incremental to a deployment revenue? I think if you have a customer that’s using your products you would want to, that would be included in the price of the products.

Mark Beariault

The deal of course is apart from our normal product license, meaning the Middleware that we ship to BSkyB we will gain a royalty revenue as we would normally do so. Of course if we’re successful with the proof of concepts on Core 3, there would be a separate royalty license, separate and apart from the IP license fee.

Todd Mitchell – Kaufman Brothers

You talked about at the beginning of your call about the importance of your relationship with Kudelski and the need to move forward together and we know that your chief competitor is vertically integrated. How would you stay competitive with NDS on the Middleware side if you were not consolidated with Kudelski? Do you see an advantage in being consolidated or do you think that you can continue to operate as you are currently?

Ben Bennett

We’ve been operating pretty effectively with Kudelski as an independent. Obviously we have other partners as well in this space that we need to honor relationships. There’s a lot of good ongoing work between the teams around product road maps, but also things like advanced user experiences that provides a more end to end fill.

It’s difficult to justify Middleware without user experiences these days because as you well know, the amount of content coming from different areas. So we’re working closely with the Kudelski in our provision.

We’re also having the same discussions with other partners. About 37% of our revenue is Middleware related comes from Nagra related work whose Core represents about 35% and debts are about 13% of that. So it’s an important partner and to compete effectively against one of our chief competitors we must have end to end solutions that are seamlessly integrated right through to the consumer.

Todd Mitchell – Kaufman Brothers

On R&D and the projected R&D to stay competitive over the next couple of years, how are you thinking about that differently and part of this back and forth with the offering here, Kudelski has charged that you need to ramp up R&D significantly and it seems to me that you’re investing fairly heavily in R&D and there seems to be a road map to get to 3.0 that’s in your three year plan. Can you give us some color versus what you’re planning in your Core 3.0 release, is there a ramp on the R&D there and are we talking more about new verticals, and if so, what are those verticals?

Ben Bennett

We’ve been investing in R&D. It’s a case of perspective. If you look at our plan for 2009, where other companies have been letting people go, we’ve been recruiting quite heavily both in the U.S. and in China as you well know. Our plan is to go through almost 20% increase in that headcount.

So that’s organic remember, not acquisition. That’s just organically improving our R&D and geared up pretty much to keep products such as Core 3, such as Core NX. On the vertical side, I’ve made statements in the past that it’s imperative. Our traditional markets have been cable and satellite.

We’re seeing a lot more activity in hybrid DTH and we’re looking at Telco ITD as a vertical and we set up a business development initiative awhile back to penetrate that market and we’ve made some what we consider investment to do that, but we would need to further invest in that space to be successful. I think specifically in the hybrid DTH worldwide, there’s some pretty interesting stuff going on there.

The other vertical area is the digital terrestrial space. As you well know we have nothing DTT today other than a little bit in Japan, and that’s the HBB TV initiative. The free to air space is growing. As analog digital grows worldwide it’s becoming a big market and we want to be able to compete hence we’re putting our hat in the ring so to speak with HBB TV.

We’re using HML based software to develop to that standard and we’ll be fully supportive of that both from a software and a CD manufacturer perspective.

The one final area for consideration in investment is around our advanced advertising space. That’s the advertising market we’re a little bit new to, but we’re still very confident about that market long term, particularly in advanced next generation campaign management systems and addressable advertising.

But to be frank, the next two years is about investment in that space and the markets are very muted at the moment particularly in the U.S.

Todd Mitchell – Kaufman Brothers

Would you consider, it sounds like some of this investment would be organic and some of it would be acquisitive if you were to decide to go after these end markets. Could you talk to where we might see it organically and where we might see it acquisitively?

Ben Bennett

We’re going to continue with organic R&D ramp up as we’ve been doing for awhile. Our Board would like to see as you well know, it’s been publicly disclosed, significant investment and I think we are making a lot of good moves in that space.

M&A, I’ve said this in the past, OpenTV has acquired a bunch of companies in the past, some of them good acquisitions, some of them not in terms of well thought out. I think the market at the moment is ripe for M&A. There’s a lot of companies in our space that don’t have the financial foundation that we’ve built at OpenTV and with our cash position, obviously puts us in a good position to acquire and get us a jump start into either new markets or to look at solutions that provide more of an end to end for example around residential gateways and more head in based technologies.

So M&A, there’s nothing I can report, but that’s certainly part of the strategy moving forward.

Todd Mitchell – Kaufman Brothers

Can you talk to the difference in the projections of how you are looking at your investment going forward versus, I’m assuming in the course of this whole thing with Kudelski you’ve had discussions about what they would like you to be doing going forward. Is there any thing that Kudelski has brought to you that is incremental to what your business plan was before this whole process?

Ben Bennett

I know where you’re going. Given the situation we’re in at the moment, as you well know the Board took a decision to have a neutral vote or offering on the tender in general and talking about the forecast, we’re not prepared today to make any statements around that. I’d like to be a bit more specific but I think you understand.

Todd Mitchell – Kaufman Brothers

It seems to me you announced a number of milestones but there was not specifically any new deal wins. Can you speak to the environment, and one of the things I picked up at IBC was a comment that this is the year there is no new business, everybody is trying to poach everybody else’s accounts. Can you speak to no new wins this quarter and to that comment as well?

Ben Bennett

It’s definitely world wide, it’s a tough market. There’s a lot of competition. There’s only so many operators worldwide we can go after. We have for example even a week or two ago we signed, I’m not going to give the name, but quite a major contract with a South American operator.

The reason I’m being cagy is because we want to make a press release when we launch the technology which is relatively soon.

There are new deals. There are new deals in the pipeline. They’re not easy to come by, that’s for sure and there’s a lot of price competition.

Todd Mitchell – Kaufman Brothers

How about just general RSP activity?

Ben Bennett

We do pretty good. We have a lot of pay TV operators looking at new solutions. That’s where Core 3 and Core 2.2 is on the Middleware front is really beginning to help. I think we’re seeing a lot of interest not just in Core 3 but MX with Core 3.

There’s a lot of competition out there within the operators. Telco’s are getting more aggressive. DTT is becoming a factor. Hybrid DTH which is actually good for OpenTV’s business.

So it is pretty competitive, but we’re still winning deals. The big deals like the BSkyB’s and Sky Perfects of the world, they’re few and far between, but we’re hopefully penetrating the Telco and the DTT markets which in the long term should position us well.

Todd Mitchell – Kaufman Brothers

I realize it’s sensitive, but can you speak to the Echo Star or the Dish Network account and what’s going on there? Have they given you any indication of what they intend to do with their platform?

Ben Bennett

We did renew the Echo Star contract last month which was good news. As you know, that’s renewed year after year. Royalties on our Middleware continue and we continue to report. We have had an ongoing discussion about next generation Middleware.

We also have ongoing discussions, and I can’t say too much about other OpenTV technologies outside of Middleware. So again, the relationship with Echo Star I consider an extremely important one for OpenTV and we’re not going to give up on that account. We have a strong team in Denver and we could be looking at some new initiatives with Echo Star I would hope after Christmas.

Todd Mitchell – Kaufman Brothers

It seems to me when I look up and down the P&L the only thing that was out of my expectations was your unallocated overhead. Why was that number a little bit high and was it related to the ongoing situation with Kudelski?

Shum Mukhergee

That was about $2 million higher and we made a comment, is related to an accrual for sales tax, so that relates both to the unallocated overhead and higher G&A expenses.

Operator

There are no further questions at this time. I would now like to turn the call back over to Mr. Ben Bennett for closing remarks.

Ben Bennett

In closing, I recognize the current situation the company finds itself in is indeed complex and I want to thank all our shareholders and indeed our employees for their patience during this time.

And with that I will formally close the call. I look forward to speaking with you on the next earnings call.

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Source: OpenTV Corp. Q3 2009 Earnings Call Transcript
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