Technicolor's (THNRF) CEO Frederic Rose On Q1 2016 Results - Earnings Call Transcript

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Technicolor (OTC:THNRF) Q1 2016 Results Earnings Conference Call April 28, 2016 12:30 PM ET

Executives

Analysts

Chetan Udeshi - JPMorgan

Emmanuel Matot - Oddo Securities

Eric Beaudet - Natixis

Rob Stone - Cowen & Company

Richard Kramer - Arete

Andrew Humphrey - Morgan Stanley

David Cerdan - Kepler

Andrew Humphrey - Morgan Stanley

Odon de Laporte - MainFirst

Alex Faure - Exane

Operator

Thank you very much. Good evening everyone in Europe and good afternoon everybody in North America. So I am here with Esther Gaide, our Group CFO to present our Q1 results. As you know, Q1 we focus on our revenues and this is a very good very strong quarter.

So in summary focusing on Page 3 of the presentation, I have five key messages that I would like to go through today. One is obviously our operating businesses as you have seen, revenues are up very strongly obviously as a result of some of the acquisitions we made last year but also the organic growth before we made these acquisitions was also achieved. So extremely good performance across all three operating businesses.

More importantly even is we have had an excellent quarter in terms of new customer wins, new customer acquisition which I will go through laying a very good foundation particularly for 2017 and thereafter.

With regard to acquisitions themselves the integrations are on track. We are actually ahead of schedule both in our Connected Home division and production services and I will talk to you about where we are in the DVD services in terms of our cost reduction program.

So everything is where it should be if not ahead. Our licensing business had a very good quarter. If you look at the end of MPEG LA and you look at the performance of our standalone licensing programs lots was achieved. All this leading us to reconfirm our comfort with our 2016 objectives and they are reconfirmed straight forward.

I will skip Page 4 which gives you the roll numbers and I will go directly to Page 5 which focuses more on some of the highlights.

So a few points, obviously the acquisition of Cisco connected devices has boosted our numbers tremendously in this first quarter but we are benefiting in the first quarter two very significant growth both in North America and Europe, Middle East, Africa. And this growth is also due to the ramp up of many new products that were won awards, that were won in the prior year.

In fact, if we were to exclude Cisco connected devices on a pro forma basis historical technically connected to home division actually grew 8% year-over-year excluding Latin America. As you know Brazil which is a large part of Latin America is in the middle of massive economic crisis which clearly is impacting our year-on-year numbers even if we see some pockets of growth in other areas particularly in Mexico, the size of Brazil but not compensated on year-to-year basis.

But the growth organically before Cisco connected devices in Europe and North America is incredibly impressive on the basis of wins we recorded last year. Added to that, the impact of Cisco connected devices we feel very, very good.

In addition, the mix has improved tremendously particularly on year-to-year basis as we are ramping up these new awards which are usually new high end devices. And finally the integration is proceeding exactly as we have planned and as expected we have started seeing the first pay backs from a cost standpoint already in the first quarter putting us in a good stead for the rest of the year.

You also see the mix obviously the new Technicolor Connected Home division North America representing now just above 50% of our total sales with Europe in the least 26% and LatAm down to 13%.

So today we have three cores of business in some of the fastest growing regions and a very good position, APAC even if not very big from a total percentage standpoint for the company in a very still high growth market with some good achievements there.

The last comment on the slide is about the mix, you will note that about 60% of our revenue is video based set-top box based the rest being broadband based gateways and routers. This is quite important just to remind you that our exposure in this business is really based upon two markets, one is the video market and the other one is the broadband market.

If we go to the next slide we try to put something together visually and we just took a few examples of wins only in the first quarter that's come in. If I look on the left on the video side, I have to admit we performed excellently, the reality is because we were able to close our acquisitions at the end of November and focus in December in terms of integration, our teams hit the ground running as of the first week of January and this is reflected in the fact that we have won some major awards.

Some of them have to remain confidential you see we have won two U.S. cable operators, significant wins which we are not allowed to provide you details on but which will have an impact in 2017, 2018.

On the broadband side on the right hand side some great wins in new technology areas particularly you saw two days ago we made announcement around DOCSIS 3.1. We also have won award around deployment of LTE gateways and fiber gateways.

Incredibly strong quarter in terms of win across the globe, you see in the U.S. significant wins but China Telecom is an example, we have actually won major awards this year in China putting us actually in a very nice position on a global basis comforting us as a global leader in this area in broadband.

On the next slide on Page 7 on integration, maybe a few comments. As you know following the acquisition of Cisco, one of our key measures is to migrate the supply chain from Cisco towards Technicolor. This migration has started, is progressing well and is on track, we have tested it and is working today - Technicolor Cisco are working in a smooth fashion transferring and transitioning this with no material red flag issued.

Synergies are well on track and I expect those to accelerate in the next few months and as I mentioned in the beginning with the first benefit already coming into the P&L in the first quarter as we had expected.

So we are well on track in terms of connecting the home to demonstrate to you that we are executing on the acquisition of Cisco connected devices. We are executing on this from a cost reduction standpoint, we are executing on it from margin improvement standpoint. We are executing on it from a new customer win standpoint.

So four months into the acquisition all lights are green, we feel very good, I feel very good about where we are going and I would say the new customer wins we have announced in the first quarter are testament to the fact that our clients are also convinced that we know what we are talking about and we have been able to win their confidence.

Switching to entertainment services on Page 8, just some highlights first on production services, obviously very significant growth of over 50% year-on-year. If we were to exclude the acquisition of the mill in 2015, we would still have grown double digits in this business without this acquisition.

So very strong performance and I am sure most of you are bored with me saying this but still running at full capacity with the full order book and our challenge today is to basically be able to meet continuous demand from our customers in all market segments whether it is film, advertising, animation or games.

In terms of our DVD services, our DVD services you see a significant growth of 25% year-on-year mainly as a result of the win of two major new customers being Fox and Lionsgate which as you know we are executing a bond on the basis of us having acquired a large part of Cinram North American’s assets in the fourth quarter last year.

So good growth year-over-year from a volume standpoint. Some very good titles in this quarter driven mainly by Disney and Fox having great tent-pole releases. Other studios having weaker but as you know given our market position now, our numbers in many cases will reflect the reality of U.S. box office trends. Some record titles produced in this quarter and - so putting us in quite good place.

Just maybe on Page 9, just to focus a few more comments on production services. It is important this business also to be recognized not just for the technology you are using and for the cost efficiencies but also for the help you give our customers in terms of winning awards and being recognized in the leadership position.

Two examples the Revenant, which won an Oscar for best cinematography, it is the fifth year in the row that Technicolor had the privilege of working with the winner of the Oscar for best cinematography. It is an important positioning in this marketplace.

A second example is the Jungle Book which was released 2 weeks ago which was enabled entirely by Technicolor's teams in MPC film which has been recognized I think by the entire industry as not just an artistic marvel piece but those are technological marvel piece raising the bar ensuring that Technicolor has now reached the highest level of performance of anybody in this industry putting us in a very good position in terms of the year and years ahead.

The pipeline in animation is very, very good, as some of you may remember we bought a small French company Mikros, while back ago focusing on development of animation projects, I am very happy to report that thanks to this acquisition, we have now won two feature length animation projects for Hollywood Studios. We have won a few others, this business is growing very well, in addition to the animation business that we have with DreamWorks and for Netflix.

We also have had some good success in the first quarter around developing some original premium content for virtual reality. This is not something that is a huge market today financially but it is certainly one that is challenging from a technological standpoint. We have taken the opportunity of the launch of quite a new number of devices to work with a number of brands and studios at creating content.

If I go to Page 10 on the DVD fronts, just if you look at the number of units you see the increase year-over-year in units, the growth obviously in both categories driven by the acquisition of the two new customers. You see three of the top tiles of the first quarter listed here and also some examples of key Xbox releases that have driven the revenue for this quarter.

In terms of the integration of production services, an integration of the mill, the integration of the mill is proceeding very well. The positive impact that we expected to see not just in terms of the mill on a standalone basis but also implementing the mill's metrics in the context of our own pre-existing organization are starting to be implemented. We have not missed a beat in this quarter and we have had a very strong advertising performance across the company.

On the DVD side, we are in the first quarter we have launched implementation of the integration of the Cinram North American assets into the technical platform, as all of you can suspect the Cinram North American platform is far from the efficiency performance of the Technicolor one and at this point we are confident that by the third quarter the Cinram North American assets will reach the level of profitability and performance that we see in the Technicolor platform.

We have a quite significant rightsizing effort ongoing, best practices ongoing and we are well on track to concluding this almost all the sets by July of this year which means in about 8 months so that we are ready for the busy season and most importantly to make sure that our second half EBITDA benefits from this additional volume.

If I go to technology on Page 11, very, very good quarter. If you take into account that we are now entering the first MPEG LA world with the very strong action plan or by lateral deal signing flow, obviously the one that we already talked about which is our video coding HEVC, but we’ve also signed this quarter some material deals renewing digital TV licensing programs. So a good quarter from a bilateral standpoint and we feel quite good.

On trademark and technology licensing a solid quarter slide growth and good progress continuing to push our high dynamic range technology solution in the marketplace.

On Page 12, Page 12 is maybe a new thing that we are trying to emphasize. We may not emphasize enough in the past as the company is migrating to becoming an normal company from a credit standpoint. Esther has talked to all of you about our focus on leaving with less cash in the balance sheet and relying more on revolving facilities. And I am happy to announce that the Esther and his team did a great job in the first quarter by adding an additional RCF line of €125 million availability as you see on the slide.

So as you see on slide number 12, the company is now benefiting from a significant increase amount of non-cash liquidity which will allow us to manage the ebbs and flows of working capital of a bigger company with bigger working capital needs yet allow us to make sure that by year end we have less cash in the balance sheet than we had in prior years.

Finally in conclusion, the only boring slide because it’s the same one as we did at the beginning when we offered our guidance, our objectives, our concerns, our Q1 number indicate that we are well on track to delivering on our objectives.

Our businesses are performing as per expectations and what is the most important thing, we are winning deals that put us in a good position for 2017.

Thank you and I think we’ll just go to the questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question today is from the line of Chetan Udeshi from JPMorgan. Please go ahead.

Chetan Udeshi

Hi Fred, thanks for letting me on. Congratulation on good numbers. Can I start with Cisco revenue which you disclosed - is it possible to get some indication on how it is on year-on-year basis, was this last year for them alone?

And then I had question around design wins which you seem to be highlighting in Q1, as well as some design wins from second half which is now ramping up. So would that mean that you know, we all know Brazil is a bit of difficult market at the moment, but outside Brazil you might see the momentum continuing over the next few quarters or these design wins are mainly for 2017?

And the same question, other question associated with that is - exactly in terms of - are they mainly on the set-top boxes side or mainly on the broadband gateway because you also highlighted wins with two cable operators in the U.S. which is quite interesting given all the discussion around FCC et cetera.

Frederic Rose

So, let me answer the second question first in two parts. First, most of this wins will only flow into 2017 because these are new product categories. I am talking about the one that really moves the needle.

The second one is preponderance of value of the wins has clearly been on the broadband side. We particularly North America have been winning the significant amount of broadband deals, not that we are losing interest in set-top boxes to say the at least but this is clear a market where there were opportunities to be won, the arrival of the new technologies, the need for operators to upgrade, we’ve talked about all this and we clearly see this happening.

In rest of the world I would say it’s a balanced mix in Europe and in LatAm in terms of win and APAC very much focused also around broadband.

With regard to your first question, Cisco as you know we only have pro forma numbers for Cisco and we cannot from an accounting standpoint say anything about what their Q1 was last year because it was not reported as a separate entity.

Doing it backwards we feel that we are comfortable by saying the Cisco connected devices on a standalone basis was actually stable year-on-year which is as you know much, much better than the performance in the prior years.

By the way what we see is that we have no bad surprises, let me put it this way, in the context of the Cisco connected devices acquisition in the last four months. Everything we thought we would find, we did find and the customers are there and the orders are there.

So I would simply say it was good and Cisco connected devices - decline of that business has stopped.

Chetan Udeshi

Understood. And last follow-up on that same - sorry too many questions from me, but one question around your exposure to the set-up box market in the U.S. We know that when you were as a standalone company you had exposure to satellite TV market on set-up box side. Now with Cisco how would you characterize your exposure overall to the set-up box market?

Frederic Rose

So right our exposure - the mix in North America is slightly different from the global mix. In North America we are about 55%, 45%. 55% set-up boxes, 45% gateways, I mean that changes a bit from quarter-to-quarter. I think that mix will move more towards the 50-50 in 2017 and 2018 given the wins we see an increase in broadband spending.

Chetan Udeshi

Thank you very much.

Frederic Rose

Thank you very much

Operator

Your next question today is from Emmanuel Matot from Oddo Securities. Please go ahead.

Emmanuel Matot

Yes. Good evening and thank you for taking my questions. Emmanuel Matot speaking from Oddo Securities. Frederic sorry to ask you that first question but looking to your stock price I was expecting some venues tonight, but it seems that everything is running well.

Are there any negative point that it will make sense to mention according to you regarding the development of Technicolor so that’s my first question. Second regarding Connected Home, how is background for 2016. Do you feel comfortable for growth this year on the pro forma basis because if my calculation all right, it was not the case exactly in Q1 due to Brazil.

And my last question is about DVD services explaining the 2x Cinram customers, how volume expands in Q1 and do you see some leverage on your EBITDA margins from these volumes course? Thank you.

Frederic Rose

So I think the impact on DVDs is, you will not see any positive impact of DVD volume growth in the first half of the year as we are bringing the ex-Cinram assets to the same level of profitability. However there is no doubt that you will see in the second half of the year which as you know is - second half of the year in this business is what matters because it's quite cyclical business.

Emmanuel Matot

Is it a negative contribution from Cinram or -

Frederic Rose

It is negative in the sense of - it doesn’t meet, it is not rolled at a level of what we have and as you know we are basic integrating emerging it. So effectively it is not something that we expect to have a material contribution in the first half of this year.

But let me be very clear, the first half in this business is not what matters, it's the second half that matters from a profitability standpoint. So I feel very good, the volumes – the sustained volume and the tiles coming up seem to be setting ourselves up for a very good third quarter and fourth quarter this year too.

With regard to Connected Home, in terms of growth let me ask to the question maybe slightly differently. I am highly confident that we will do much better than the markets in terms of growth this year. I'm highly confident that we are winning market share. I can't tell you exactly where the market is moving right now, is the market generally stable or not it's difficult since we’re the first ones to release results. But we feel clearly that we are winning share.

And then now yes, your first question, I don't actually have any bad news, I apologize.

Emmanuel Matot

Okay, that's clear. Thank you, Frederic.

Operator

Thank you. Your next question is from Eric Beaudet from Natixis. Please go ahead.

Eric Beaudet

Yes, hello guys, this is Eric Beaudet from Natixis. I have a couple of questions regarding your technology division. First of all is on the $60 million decline you mentioned on MPEG revenue. I thought that MPEG revenues would stop only from April 1 of this year. So I was wondering if you had any recognized any revenues at this quarter from MPEG or it actually - basically your last revenues recognized where last year and that's it in Q1 we have no more MPEG.

And my second question is on the other hand, you've seen a very big increase, you are able to compensate that by an increase in other technology revenues which must be more or less €50 million. Are these the contracts you recently signed? Is there any one-offs in there or is that €50 million extra revenues will continue every quarter going forward. Thank you.

Frederic Rose

Thank you, Eric. On the first question on MPEG, as you know we basically recognize revenue as cash gets collected and while we had indicated is that we would expect the end of the MPEG program to hit our P&L in the first half of this year. The reality as we are already in the second quarter is it will be mainly in the second quarter of this year. So that's just the timing issue in terms of cash collections.

The second point as with regard to the revenue recorded in the first quarter. You're correct, as I indicated in our February call, the HEVC license agreement is a lump sum deal including for the future which is a onetime deal. Obviously we cannot sign with other HEVC deals whereas the other transactions are normal running royalty transactions.

Eric Beaudet

Very clear. Thank you very much.

Operator

Thank you very much. Your next question is from Rob Stone from Cowen & Company. Please go ahead.

Rob Stone

Hi Fred, I wanted to follow up on Connected Home a little bit more. And in particular your comment about being confident of outgrowing the market and gaining share. What do you think is leading to those wins in particular since the combination with Cisco only got finished at the end of last year. Are you already accruing benefits from that. I mean does the fact that you was coming was known for a while before it happened. Thank you.

Frederic Rose

Thank you, Rob. So obviously why we’re gaining share, well first of all is, I think we were able to - I'm going to just bring it down first to people. We have been able to put together a great group of people from both companies and also some new hires from the outside, who really have jilt as one team.

Second reason is, we clearly are now the uncontested number two player in the marketplace. And we are able now as a combined company, we review not quite differently than we were reviewed independently and we reviewed as a incredibly credible alternative in the marketplace and go-to-place.

We have been able to also - I wouldn't say recover but that's nearly the wrong term, is to gain the confidence of some very large customers who previously whether it was with Cisco – had question about Cisco's long-term commitment and therefore we're careful about the amount of volume they would give to Cisco.

And with regard to Technicolor we are concerned about our long term commitment also to this marketplace.

I think having clearly address this issue from a marketplace standpoint, from a customer standpoint has really enabled us and that’s almost psychological anything else has enabled us to achieve these wins.

But Rob I would not at all underestimate - undersell the fact that five months period we had prior to closing was incredibly effective and the willingness of Cisco to help us to prepared this integration, to execute and actually to help us today deliver on it is really a key factor.

You really have from a customer standpoint, we have had no complaints about those dropped if anything we are getting good feedback because they find the reactivity to be quite impressive and this is possible because the two companies have worked really close together and are working closely together today to make this a reality.

So obviously we cannot drop our eye of the ball but this is a very, very nice first quarter.

Rob Stone

Okay. Another question on Connected Home, how do you see potential impacts for your business of this FCC opened set-top box initiative?

Frederic Rose

Okay. So let me just try to make it short. First of all about half our business is broadband and is clearly not affected in negative way if anything the increase - any increase in OTT penetration, any increase in video services can only be an opportunity for us in terms of the broadband market.

In terms of video, the summary is whatever SEC rule is adopted – not adopted, I cannot believe and we do not believe can have a material impact on the business over the medium term.

Over the longer term by 2019, 2020 if SEC decisions were adopted and implemented immediately, it would actually provide an opportunity to accelerate the growth of OTT and OTT is something that can have many people selling OTT, we see this as an opportunity for further innovation to marketplace from our existing customers and future distribution channels will be looking at launching differentiated products and services which will require know-how we have.

So from a vendor standpoint I believe the sense of panic that may have prevailed in some circles about the depth of the set-up box are as usual massively overblown. We already sell a lot of our boxes effectively OTT boxes. We sell to people who are already entering at other people territories, and if anything – and if that’s trying to accelerate, there will be more competition from a vendor standpoint that is not going to change the face of world.

Now surely from a regulatory point of view, we think that the SEC rule is confusing and it’s playing catch-up and trying to basically mandate things which are happening and probably will create a lot of confusion in terms of the marketplace of what you can do and cannot do. But that's more kind of editorial comment.

From a pure business standpoint, we do not see given where our business is structured given our service offering and given what we are selling, we don't see at this point a downside unless there is something else that's growing that we not aware of.

Rob Stone

My last question please is, partially a segway on the subject of growing share of OTT and different competitors. What are the factors driving the organic growth in your production services, is that also an example of where Technicolor is benefiting from share gains or do you also see more players doing more forms of content, some of the top players are doing original content of their own and you are involved in that and virtual reality is another new category.

So is your market growing in a secular way maybe aided by these technical factors?

Frederic Rose

So actually the answer is both. The market is growing, the number of customers and budgets on production are increasing and where I talk about production - the example you give is Netflix Amazon but it’s original content – premium original content is growing, it’s not just tent-pole movies, its TV series.

The advertising budgets are changing but what we're seeing is increased spending in the high end advertising market which is where we're focused. Advertising that's launched on MCN channels for example or super ball ads, I think example we see, those are continuing to grow.

From a market share standpoint in these markets and some we are continuing to gain market share as a slower pace obviously given our size. Advertising we're seeing both MPC and the Mill are two advertising brands continue to gain market share at a slower pace because the market is also growing but we're also gaining market share.

Animation, in animation in think we're gaining market share but what we're gaining as we gaining market share where we convince customers no longer to do this in-house in some cases and to go externally. And in some other cases we have one against some of our smaller competitors some new share.

So really the answer is a mix of the two which is how we achieve organically double digit growth even before the acquisitions.

Rob Stone

So you mentioned the business is good and one of the big challenges is being delivery commitments. My last question is how you feel about being able to leverage the platform versus your need to spend more on infrastructure internally to support all that business. Thanks.

Frederic Rose

So that is always the questions how can we our assets more, we are always – today I would say our biggest block right now to growth is people and physical space with people being quite important. From a CapEx standpoint we have obviously made some commitments in order to be able to deliver the revenue and EBITDA growth.

I do want to remind you that, even after all the investments we are still very materially free cash flow positive in this business. But the reality is in the market which is growing organically and which we're still gaining and we're gaining share. We will have to continue to looking at opportunities to expand organically or through such things like higher and so forth.

We have nothing to announce in the first quarter but if some of the reactions of the customers as some of the recent work we have done were to translate in orders, we clearly would have to update the few things which is left to update our size, planning but also then our revenue expectation guidance to the market. We're not there yet but let us put this way, these are good problems to have.

Rob Stone

That's true. Thank you very much.

Frederic Rose

Thank you very much Rob.

Operator

Your next question today is from the line of David Cerdan from Kepler. Please go ahead. David your line is open please check you're not on mute.

Frederic Rose

No, we seem to lost him.

Operator

Okay David, we're going to release you, please press star one again. And we'll go to the next question which is from the line of Richard Kramer from Arete. Please go ahead.

Richard Kramer

Thanks folks, just a few quick ones. First one Fred, can you tell us what's the message behind slide number 12. Are you basically saying by having less cash in the balance sheet you can be more aggressive with capital returns? Are you trying to show us that you've got more flexibility than the market things and when I ask each you to one of those internal one after another go ahead.

Frederic Rose

So what we're trying to say here is, what we said is that you should expect us to deleverage to focus on deleveraging. And you should also focus of not having ideal cash sitting in the balance sheet.

We don't have €350 million, €400 million in the balance sheet at the end of the year. We want to basically use our cash in a much wiser way and which in the short term as I've indicated in February is aimed at getting our debt-to-EBITDA ratios back down to a much more acceptable level which we said below one and that's 1.4 ish - below 1.4 is the target but we’re aiming at reaching 0.8.

So this should be - the message behind this is this should give you confidence that we can actually release the cash sitting in the balance sheet.

Richard Kramer

Okay. Next one on the lump-sum HEVC deal that you did, I guess I know it’s very tough to comment on what might come in licensing negotiations but having this first deal under your belt, do you think you can now parlay this into an example that you can get subsequent deals i.e. one of the concerns that’s been in HEVC, that the deals would be a long time in coming under your old arrangements now that you’re going in alone again concern is a timing of deals. Is this having this one deal make the further ones more likely to be material this year?

Frederic Rose

I was about to say yes and when you said this year, I did my turn, the answer is we’re more likely but I'm not going to say this year because that would be a guidance commitment. I would simply say that having signed with one of the established largest players, having their proof point done and now having progressed since the last time we had the call and started discussion having to putting the books together, we’ve launched a process.

I feel confident that this will accelerate. I just want to mention that I feel good about that I'm not going to say this year Richard sorry, I will just say that things should be going much faster than they will go for the HEVC advance pool.

Richard Kramer

Okay. And I guess the last one is you’ve talked in sort of generic terms about the integration being on track with the Cisco Connected Home. I know you had a number of separate milestone deals that you have to sort of kick-off. Can you give us an update of how far you are along in the process I think it was 30 some separate items you had to kick off with Cisco and put that integration and indeed synergies come earlier than you expect?

Frederic Rose

So what I said was with regard to Q1, is as expected we’re starting to see some of the benefits coming in. I have also said is that the migration supply chain has started, and you can expect in the July update, I will give you same kind of quality update that we gave you six weeks ago in terms of the integration.

I don’t have a15 material things to do but I can tell you for example that we've progressed our work stream relating to vendor contract, supplier contracts where we have now closed agreements with all our key vendors in terms of pricing and so forth.

We also have not at this point communicated the level - how much of synergies full year synergies we expect to get this year versus next year in the U.S. which I think is what you’re going after.

I don’t feel that in this Q1 call this was an appropriate topic, I think in any cases I gave you something at this point there will be some doubt, I will be much more comfortable giving you some further guidance with our half year results or full P&L and 7 months under our belt I think we’ll be a lot more - you have a much higher level of comfort with what we tell you at that point in time.

The message today is, well on track, no red flags, I feel comfortable and you should not be expecting any bad news.

Richard Kramer

Okay. So you’re not going to update the accidental 10% EBITDA adjusted EBITDA margin target that you gave -

Frederic Rose

I have Esther sitting next to me with a knife. If I say something like that, again she kills me. So once every ten years.

Richard Kramer

Okay thanks.

Operator

Thank you very much. And we have David's line come back so David, please go ahead.

David Cerdan

Good evening, gentlemen. Two question for you for Rick, first one regarding your schedule beyond 2016 can we have an update on it? Second question, regarding your first DVD TV – that you have improved and other question regarding M&A as a production - very steady business. Is it right timing to consider to make some acquisition for you.

Frederic Rose

David, thank you for proactive questions as usual. On the first one, the fact that I did not talk about to 2018 guidance was simply not because certainly we've forgotten, but we have - we're still in line with what we said 7 weeks ago for the 2018 guidance and there is absolutely no change and I was actually just focusing here on 2016. So there is nothing to be read into this personally - with the short term and medium term guidance we gave.

In terms of financial flexibility, you just used a dirty word of M&A, and I'm just saying dirty word, because I think the expectation of my shareholders, of my Boards and I think of my management team is that we continue to focus on the integration. And we make sure that we digest and integrate and deliver results the market before we even contemplate going back and saying hi, we have a great new idea.

There is a phase for everything. We are now in a phase of digesting and delivering results. I've given you some very strong messages about how we feel about this. First half results will indicate whether we are on track and we're gaining your confidence. Once the financial markets, once the rating agencies and once our shareholders are confident that we are on track and most importantly that my board feel that we're on track, we'll then start looking at other things.

But I think this is not the focus today the focus today is on that. In terms of growing production services, to be frank, there are things we can do today organically that we should just do there is self help things let's focus on that.

Let's make sure first that we've delivered to you to prove that the mill acquisition was not a mistake, was well integrated before we try and quickly do something else. One step at a time.

David Cerdan

Okay. And is it possible to have - a new acquisition are we getting production services, two questions. First of all regarding virtual reality, will you need to make some acquisition and small one. And secondly, to enlarge your skills - and second question is regarding the M&A in this business line do you see some competitors to acquire to small companies.

Frederic Rose

So let me – so it's very good question on virtual reality. So today while you may have about 350 companies in the virtual reality space, in the domain we're in which is around creation of content, content creation really this is a nascent market. We seem to be in as a good position as anybody else. We certainly seem to be winning deals. We certainly seem to be delivering content. And we haven't seen anybody out there that we would say, we should buy them their geniuses and so forth.

It turns out and this our client's feedback that we're doing a good job. We're learning they're learning, but we're doing a good job. We are hiring more people and more skills where we need them. We are hiring more game developers for example coming from the games world to help us because there are a lot of aspects related to game. But a lot of things we need we actually already have in-house or it involves more talent and nothing else.

From a technology standpoint, we are relaying our R&I, Research and Innovation teams in particular to develop tools that we need because there is nothing out there in the marketplace. So we're doing this organically.

We keep a close look at what other people are doing. But at this point in time, I feel if there is one area that we'll be very surprised that we would even looking at an acquisition is in the space because the field we're in is not a field that has attracted a massive amount of startup, the startup seem to be focused more on the capture, cameras, light field technologies in terms of capture. And also in terms of call it a headset to distribution so forth.

We're in that middle spot where you've got all these things where you still need content. And the reality is if I look at the projects that are ongoing, we seem to certainly be doing well organically. And we're going to grow this so that in about two or three years we'll become hopefully material.

But this is not a domain in which at this point in time, I could see any worthwhile M&A. We can change in two or three years time, but from a maturity standpoint we seem to be as mature or immature as anybody else in the market.

David Cerdan

And do you see some competitor from acquisition?

Frederic Rose

No, we are in a virtual reality.

David Cerdan

No in virtual reality you see some competitors in M&A or strategy?

Frederic Rose

Nothing that I'm aware of in a public way, I mean you saw today's announcements I guess you're referring to prime focus doing some very complicated deal that I don't understand through Hong Kong Shell Company and so forth. And I'm not sure that was M&A, I think that financial engineering between Indian and the Chinese company.

In terms of real M&A the way we've done this with the mill. Yes something could happen, but I don't, to be frank, I'm not very focused on that I don't think this is a big area of concern to us given where we are today.

David Cerdan

And very last question you to [indiscernible]?

Frederic Rose

What?

David Cerdan

[indiscernible]?

Frederic Rose

So I there refer to you to the February announcement when we said that once we reach a level of 0.8 debt-to-EBITDA the Board will then look at rewarding shareholders through a mix of increased dividends and share buybacks, but since we're not yet 0.8 you should wait and probably few more quarters until we get that.

David Cerdan

Okay. Thank you very much.

Operator

Your next question today is from the line of Andrew Humphrey from Morgan Stanley. Please go ahead.

Andrew Humphrey

Thanks. Just I think most of my questions have been answered, but just one on the DVD services business you mentioned you'd expect Cinram assets to make limited contribution over the first half. Can you maybe give a more granularity on any restructuring spend you are putting in that we - you should expect to see this year?

Frederic Rose

I don't think there is anything from at group level. At group level I think you will be in line with what we have guided you. Esther, we've given something, but there should be, there's nothing there - it is basically be very low double digit number just for this restructuring.

I mean this is mainly a workflow. The major issues are workflow process related in terms of gaining efficiency. So it's not a question of firing ten thousand people, it's really a way of working and getting a match improved yield of existing facilities. So shutting down the headquarter function and migrating systems to us.

So these are not high cost from a restructuring standpoint, they are very beneficial to the bottom line assumes the effect but you can imagine changing the workflow of a plant does not happen in two days. So everything is aimed at changing in them and migrating our own call at workflow before the beginning of the busy season.

Andrew Humphrey

Great, thanks.

Operator

Your next question is from the line Odon de Laporte from MainFirst. Please go ahead.

Odon de Laporte

Yes, good evening. This is Odon de Laporte from MainFirst, so congratulation for the strong execution. Just one question about the pricing environment in Connected Home, I was wondering if your customers request some price discounts as you expect synergies from the relatively Cisco.

Frederic Rose

No customer has asked about this in the terms you describe actually - as you know our existing contracts are written and customers have not come back to us and ask us saying hi guys, you have announced these things, so now give us an additional discount. I would say just extending the question, which has nothing to do with the merger.

Obviously Brazil is a market where operators are putting a lot pressure, desperately trying to get the price reductions has nothing to do with our merger has to do with the economic crisis. One of the reasons why you see this massive drop in revenue on our side is, we are not willing to sacrifice margin for the sake of volume.

We are very much focused on achieving the margin commitments we've made for 2018 which implies a very strong improvement already this year. So, the answer to your question is actually no.

Odon de Laporte

Okay, thanks. And just one follow-up question on the technology business, is it fair to say that excluding compression technologies MPEG LA on the HEVC, your licensing business was growing year-on-year in Q1?

A – Frederic Rose

Yes.

Odon de Laporte

Okay, thanks. Thank you very much.

Operator

Okay. Your next question is from the line Alex Faure from Exane. Please go ahead.

Alex Faure

Hi, good evening. Thanks for squeezing me in. Just a quick question was to cable operator wins in the U.S. on the set-top box side. Could you maybe share with us any color on whether that’s Tier 1 customers, Tier 2 or Tier 3, I mean was there fury cable TV operators into U.S. so any sense of the size would be extremely helpful.

And other than that I was just wondering it seems like excluding syndrome DVD revenues were like mid-single digit in Q1 does that sound about right and if so I mean is it just a sort of trends you're seeing for the rest of the year. You reckon maybe Q1 was particularly strong on the back half I don't know Star Wars or whatever?

Frederic Rose

So on the on the second question, it’s a complicated question because we really look at it by studios. So we’ve had two studios that perform extremely well and record performance which are Fox and which are Disney and the other ones having been much weaker.

So we have to be careful in terms of extrapolating from one quarter to the next quarters as you know because it always has a consequence of the box office. So for example, the strong performance of Zootopia, Jungle Book and Captain America by Disney in the second quarter is clearly going to carry in the third and fourth quarter in terms of volume.

The strong performance - the weak performance of some other titles, of course is going to some different. Maybe a better metric is to say that this summer we will see 22 tent-pole releases in Hollywood which is the highest number we will have seen in many years. That basically means that we should expect not all of the movie successes, but the probability of bigger successes in prior years is probably good that which would have beneficial impact.

Obviously, I like the fact that there will be a Star Wars every year, so we will have one next year and apparently it goes out for long time. I like the fact that things like Avatar now is going to be slated for the years and so forth. We see that these titles really drive record of volumes. So that is really key.

With regard to your first question, the customers we've won in North America the two U.S. cable operators, I can confirm to you that they are Tier 1.

Alex Faure

Okay. Thank you.

Operator

Your next question today is a follow-up question from Chetan Udeshi from JPMorgan. Please go ahead.

Chetan Udeshi

Hi Fred couple of questions on technology just follow-up. Did you mention what was to MPEG LA amount in Q1 that you recognized? And secondly on digital TV new licensing deals, I think from the last update, at least my understanding was that you were not signing any new deals because of the Sony inclusion of their pattern, has set chain, so are you now seeking new deals for the combined portfolio again. Thank you.

A – Frederic Rose

So actually a very good question, so these deals that we did in Q1 are you as you know you remember we had - I mentioned to you that we have transition periods. And we were not – the vendors were now off license with both companies at the same time.

In this case, we took advantage of some slightly larger windows to basically conclude where would call [indiscernible] to conclude agreements to cover. More limited period than we usually do. So then we can switch to the joint combined portfolio.

With regards to the combined portfolio I can tell you that we actually have in the first quarter delivered our first book to a major manufacturer to start negotiating a royalties on the basis of a combined patent portfolio. I'm not changing my guidance, my expectations to what I told you in terms of the - how this how this ramp up will work, which is really by 2018.

As you know these negotiations take time. But what is good news is that we already have together our first book and already initiated discussions we actually expect to put together at least two more books before the end of the year so that we will be initiating discussions starting this year with what are basically the three largest manufacturers in the world.

Chetan Udeshi

And did you disclose what –

Frederic Rose

Yes, I’m sorry, I forgot the first part of question but that must [referred] [ph] in slip because I probably don’t want to answer it. But we have not communicated that number because we don't communicate at my course - on the interim quarter because somehow I think you have enough information to approximately guess the size of MPEG in the first quarter.

Chetan Udeshi

That's helpful. Thank you.

Operator

Thank you. And the last question today is from the line [indiscernible]. Please go ahead.

Unidentified Analyst

Hello gentlemen can you hear me?

A – Frederic Rose

Yes. Yes I can hear.

Unidentified Analyst

Hi good evening. Several questions from me if I might, just on the set-top box wins that you have to a cable operators, would there be new logos, because you're splitting video and broadband with these new customers.

Second question if I may, the way consensuses – the way set up right now, people have a declining EBITDA in 2017 and a growing again in 2018. Considering the optimism you seem to communicate on Connected Home based under these new wins, do you think 2017 could be a growth EBITDA year or not.

And just also just in foreign exchange, you’ve talked about renegotiating some of your contracts because of the swings in the euro dollar rate with your set-top box customers, this has been done and is it just flexibility in terms of your contract terms depending on FX volatility and just in the plan if you can remind us what your FX assumptions are for 2018.

And the last one, your gross margin in Connected Homes are about mid teens or slightly higher, 16% something. I think pays at margins side they're 19%, 20% range. Do you think those kind of gross margins are achievable in this business or do you think they were "over earning" and thus a more realistic number that the 17%, 18% range. Thanks.

A – Frederic Rose

Yes, so first of all I'm not going to answer if you don’t mind. In 2018 FX assumptions I'm not going to answer that question, if you don't mind. In terms of the new customers they are in those product categories, these are new customers. These are we, we do business with, but these are new product categories, we've entered into.

In terms of the EBTIDA growth in Connected Home, 2017 yes, we expect to grow the EBITDA of Connected home 2017.

Unidentified Analyst

I was asking the question overall. Like people are modeling for the company because you have obviously a gap with MPEG LA next year, but could that be compensated by Connected Home for example.

A – Frederic Rose

So I have to just state on the record on this call that the company has given guidance for 2016 and 2018 and on this call there will be no additional information provided as to guidance and particularly the question you're asking, which is a good question, but I cannot answer because it has not been communicated.

In terms of - but maybe answering if I differently in terms - so I’ve answered the question but from a Connect Home standpoint which is in line with what we've communicated to the markets. So obviously if we expect EBITDA to grow, you should also expect the gross margin to grow on the year-over- year basis in this business.

And then I think you had - yes you have another question on the FX, the European contracts we had that we saw on the Q4. I can tell you that we have not concluded negotiation of 100% but we have largely concluded them with almost all that customer would not yet done 100%, but we believe we have now from the materiality standpoint derisk this and we will not have this issue right again.

Unidentified Analyst

Okay. And just one last if I might, just in terms of pricing on Blu-Ray and standard definition DVDs, what are the trends you are seeing of late you’re becoming – I guess you’re £800 gorilla in this activity. Does that allow you do you think to capture going forward better pricing and what’s the delta today between the price premium for Blu-Ray disc verses standard definition. Has it widened, bigger, lower or same.

A – Frederic Rose

So, maybe well to say in the business we sign multi-year contracts with prices of fixed and determent of periods of 4 to 5 years. We haven’t had any material contract that's has been renewed in 2015. We had no material contract renewal in 2016 so the prices for – where [indiscernible] business or actually fixed contractually over multi-year period.

Obviously you are correct, we make a higher selling price for Blu-Ray which is also, you as a consumer you pay more for Blu-Ray business than definition, so you find a same thing in our selling price.

But from a variation standpoint in terms of [indiscernible] which is our margin generation, what we look at is really is our efficiency in terms of the yield we can achieve and obviously the roll of volume numbers from our customers.

Pricing is an issue but it’s an issue every 4, 5 years. So the first material renegotiations for pricing would be in 2017 - mid -2017, so I think we still ways to go, I think I'll stop there.

Unidentified Analyst

Thanks a lot

Operator

And those are the questions.

Frederic Rose

Thank you very much everyone. Have a great evening. Thank you, Operator.

Operator

Thank you very much. That does conclude the call for today. You may all disconnect your lines.

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