Technicolor's (THNRF) CEO Fred Rose on Q2 2016 Results - Earnings Call Transcript

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Technicolor SA (OTC:THNRF) Q2 2016 Earnings Conference Call July 27, 2016 12:30 PM ET

Executives

Fred Rose - CEO

Esther Gaide - CFO

Analysts

Chetan Udeshi - JPMorgan

Richard Kramer - Arete Research

Rob Stone - Cowen & Company

Andrew Humphrey - Morgan Stanley

Eric Beaudet - Natixis Securities

Operator

Welcome to Technicolor's Conference Call chaired by Frederic Rose, CEO and Esther Gaide, CFO. [Operator Instructions].

During this conference call, statements could be made that constitute forward-looking statements based on management's current expectations and beliefs and are subject to a number of risks and uncertainties that could cause actual results to differ materially from the future results expressed, forecasted or implied by such forward-looking statements. For a more complete list and description of such risks and uncertainties, please refer to Technicolor's filings with the AMF.

I would now like to hand the call over to Frederic Rose. Sir, you may go ahead and I'll be standing by.

Fred Rose

Thank you very much. Good afternoon. Good morning to those of you in the U.S. So, I'm here as every quarter with Esther, our CFO. We will go through the presentation. Our objective is not to read every single part of it to you. We'll identify the salient points and we will then move on to questions and try and give you answers. So, if we go directly to page four, what are the key highlights, the key messages? The key messages, well, I would say the most important one is the transformation of Technicolor is on track. We're doing well.

We're doing well operationally. We're doing very well with our acquisitions. We have a very high level of confidence about delivering the results that we've committed to. And from that standpoint it's good news. Most importantly, we reiterate and confirm our 2016 objectives. In addition to reiterating our objectives, we're also informing you that we're accelerating the deleveraging of the debt. And we're proceeding this week with a €100 million prepayment on our senior debt, given the very significant amount of free cash flow generation in the first half. Esther will get back to this.

Last point that I'd like to make is a lot of you look at our EBITDA generation, where it's coming from. On this page, four, 86% of our H1 EBITDA is coming -- sorry, 67% is now coming from our operating businesses. And if we just look purely at the licensing business, 86% of the EBITDA is now coming from non MPEG LA revenue which is all good news given the levels attained. If we go directly to the businesses and I go to page six on Connected Home, I'm sure I'll get back to this in the questions, but if there are a few key messages to take into account they are the following.

Operationally, if we just look at the historical Connected Home previous to the acquisition of Cisco Connected Devices, we grew in the first half at constant parameter by 5% over last year. And in the second quarter, we actually grew by over 12% versus last year. So, a very strong performance across all segments by the Connected Home historical team, but also very good performance by the Cisco Connected Devices integration team progressing on this.

In the first quarter, I talked to you about a number of customer wins. You will see in this presentation a few pages later a listing of other customer wins. We've also had a very strong series of customer wins across different geographies and across different market segments in the first quarter. But probably the most important news is on the next page where you see our profitability. And when I say that our integrations are proceeding well and that we're ahead, the best place to reflect this is actually in our profitability. And you see the massive improvement in EBITDA that we have generated year-over-year, all thanks to the integration, the doubling of our activity and quite a number of actions, but we've gone from 4.3% to 7.7%. And all this is putting us in good stead to meet our guidance, to meet our objectives, whether short term or long term.

On page eight, a sample of wins. I would just flag that we have announced without disclosing the customer a major OTT, over the top, customer win in North America. We have also -- in the video space we also have continued to strengthen our position in broadband with some wins across the globe. In terms of page nine, the focus on the integration of the Cisco Connected Devices, what I can tell you is that we have actually concluded the full migration from the Cisco supply chain as of today which is ahead of schedule and we have made significant progress in implementing our synergies which means that we have launched the R&D and the R&D efficiency measures a little bit earlier than expected. And we're now proceeding with that level of synergy effort.

As you will see reflected in the working capital, a big part of our working capital improvement also comes from the incredible, rigorous inventory management by our finance team and by the Connected Home management team.

Going to page 10 on entertainment services, first on the revenue side, continued very strong growth in production services. Obviously, with the acquisition of the mill, this helped to get us over the 50%. But, even without the mill acquisition, we still experienced double digit organic growth in our visual effects activities, continuing on the same trends we have seen over the last eight or nine quarters.

On the DVD revenue side, thanks to the acquisition of new clients and in particular Fox and Lionsgate, we grew our revenue by close to 24%. Now, the impact on the EBITDA is mixed because production services has continued to improve its margin and has had a very good first half of the year. And on the DVD side, our business, excluding the Cinram acquisition, actually improved its profitability year-over-year.

But, as you know and as I disclosed to you in the last call, the Cinram assets we purchased were not performing at the level expected to generate profitability. We have spent the last six months turning this activity around and I can tell you today that this activity is now performing at the same level of efficiency as the Technicolor ones. And we fully expect, forward-looking statement, these activities to generate the same level of profitability as the Technicolor ones starting the second half. The integration of the Cinram activities is now fundamentally concluded and we expect to see the benefits of this coming down into EBITDA and free cash flow starting actually in the month of July this year.

On page 11, I won't really comment on it. It's some nice visuals of different projects we're working on using all our brands. And the key comment is this multi-brand strategy we have around visual effects and postproduction is clearly paying off. It's clearly delivering results. We're seeing all our businesses grow significantly in their markets.

On page 12 on DVDs, I'm going to again disappoint the doomsayers on DVDs. We grew year-over-year significantly, but the most important two numbers you could look at are Blu-ray up by 30% and games up by close to 20%. As you know, these two markets are very important to us from a profitability standpoint.

Page 14, two messages; one, an incredibly strong performance of our non MPEG licensing activity. You saw in H1 we made -- in Q1 we made some announcements about some new contract signatures. Well, we have continued on that trend in the second quarter and we're delivering some very strong -- we signed some material new deals, particularly around set-top box. We're very happy that we signed a significant set-top box contract in the second quarter.

The MPEG LA revenues at this point that we will collect this year are very significantly below our expectations from February. However, given the strength of our direct licensing program and our performance to date, we're very confident that we will meet our objective of €200 million of EBITDA at year-end in licensing, obviously with a very small part coming from MPEG LA. So this, to me, is really good news for the future. It shows that we actually have quite a strong performance. The changes in management team we have made and processes are really starting to pay off earlier than expected.

The EBITDA, well, as you know, in parallel to managing the reduction in revenue, we've also been looking at our cost structure which is how we have been able to generate a 74% margin in the first half of the year which is actually quite impressive on the significantly lower revenue number year-over-year.

And I think I'll pass it on to Esther now.

Esther Gaide

Thanks, Fred. So, if we turn to page 16, just one remark. We have been growing the revenues by over €800 million which -- plus 50%. That's very important when we're going to be commenting the flows. I propose we go to page 17 where we look at the strong free cash flow generation. We have been generating nearly €100 million of free cash flow together with growing the business by more than €800 million. It's a strong performance because it's something we're working to achieve, showing that we have been integrating a business like Cisco with still generating free cash flow around the first of the year.

If we turn to page 18 and we start from -- we'll go from the bridge to EBITDA to free cash flow. We see that we have been growing the EBITDA from last year to €265 million. And the most remarkable thing is we have been able to generate on the working capital spot plus €66 million. That came with the strong management of the inventories and all the accounts receivable and payables of the Group. And that was a strong effort doing -- by all the management of the Group with achieving a free cash flow of nearly €100 million.

If we turn to page 19, we have been putting together the items which explain why we have been losing €100 million in the net result. That comes from three buckets of costs. The first bucket is related to the 2015 acquisition. We have been buying companies. We have been generating goodwill and under GAAP and IFRS we have been obliged to do what we call purchase price allocation to assets. Those assets will be amortized between three and eight years. And that has generated €80 million of amortization for H1. That will be generating around €40 million in a full year basis.

And then we'll have also on those costs related to 2015 acquisition integration costs and R&D write-off. Obviously, when we merged with the Cisco business, we had to choose between the different R&D programs and actually some write-offs were expected and they have been realized now. The second bucket is related to increasing financial costs, borrowing costs. Obviously, we have been growing our debt for more than €300 million. That has generated interest expenses and then we have some fees and some Forex that has also increased. And the last point which is a reserve of €50 million on the CRT legacy litigation, the cathode ray tube. We have been booking a reserve and that has also impacted the net results.

Page 20, you have the bridge between EBITDA and EBIT. Basically you have the same kind of items I have been explaining in the previous page. Page 21, you have the EBIT to net income. Again, that's the same kind of topics which are reflected. As you may also see on that page, the income tax is flat.

And page 22, you can have the cash position. We had at the end of June €434 million of cash. We have been decreasing our debt by €40 million. Basically our ratio which was net debt over EBITDA, as of December 2015 was at 1.76. As of June we were at 1.55. And as Frederic has mentioned, we will be repaying €100 million by the end of the week.

On the 2016 guidance, I think we're confirming the objectives on free cash flow to be above €240 million; on EBITDA to be between €600 million and €630 million; and on the net debt over EBITDA to be below 1.4. And also, we confirm also the performance we have on the different operating business and on the technology business.

Fred Rose

So, just to be no doubt, we're reconfirming unequivocally our guidance for the reasons that we have had an incredibly strong first half. But, much more importantly, I feel very good, we feel very good, about the second half and what's coming down, looking at our backlog, looking what we're doing.

This concludes the presentation part and I think we can go on to questions.

Question-and-Answer Session

Operator

[Operator Instructions]. And your first question comes from Chetan Udeshi from JPMorgan. Please ask your question.

Chetan Udeshi

Maybe one question around Connected Home, where at least the sales number is weaker than what I and consensus was expecting. It seems the underlying growth in the standalone business was quite strong. But can you just help us understand how Cisco business did maybe on a pro forma level whichever way you want to give us an indication on its performance? Because clearly we don't have historical data for Cisco to compare Q2 versus last year.

And secondly on technology division, it seems, maybe I am wrong, but most of the €18 million revenue was recognized from MPEG LA in Q2. So, what is the underlying run rate of the ongoing business in technology licensing? Because you also had some patent sales which might not occur in following quarters. And what is -- so, are you expecting more patent sales in second half that will allow you to meet the €200 million plus EBITDA guidance even with lower MPEG LA contribution? Thank you.

Fred Rose

So, I'm going to answer the second question, but not exactly -- I'm going to give you information but not probably answer your question the way you would like, Chetan, but you're used to this by now from me. So, obviously we have run rate contracts, so we have run rate revenue that comes up. Some of them are quarterly. Some of them are semiannual. We also know what is coming in the second half and we also know what contracts we're very confident, very highly confident, to win. We're not putting in there in our guidance things -- blue ocean type opportunities.

In terms of the quarterization of this business -- and you know this because you write a lot about this. You cover this. It is a business that's absolutely impossible to look on a quarter basis. And I've always told you that we would guide you on an annual basis and not try and explain what happens from one quarter to another except being factual. But there should be no doubt that we're highly confident that we will -- notwithstanding the massive hit, negative hit, in MPEG LA, that the strength of some of the underlying programs which were not expected at the time of the guidance will enable us to reach the position of €200 million of EBITDA.

On your first question, as you said correctly on the Cisco connected devices, we don't have the historical data. But what I can tell you is there has been very good progress with key accounts. And more fundamentally, as you know, the Cisco connected devices team has brought us a very significant presence in North America, particularly in North American cable, particularly with what are now the two largest cable companies. And the Q1 and Q2 experience we've had in terms of order intakes, new wins, has certainly validated that.

We also have seen some very positive movement from historical Cisco connected device customers in a country like Mexico, for example which has now become one of our largest markets in the world outside the United States, as well as in Europe.

So to date, while I don't have historical figures, I can tell you that the investment thesis we made, that this business that combines two business, would help us grow the top line revenue has been met. But most importantly, the most important metric, the only metric that we cared about obviously was improving the profitability in order to get to that 10% target over the next few years and of course to generate cash. We have been very careful in the first half to make sure that orders we're booking will meet our profitability level requirement. We're very focused on improving the profitability and we're not engaging in price wars which do not -- which would not enable us to reach that.

So, it is quite important to emphasize that the revenue -- I thought the revenue was actually very good in the first half of the year. But at the end of the day, it was very good because it gave us the profitability. It gave us an accelerated profitability improvement. I expect in the second half of the year revenue levels -- just to help you in terms of your model -- to be reasonably constant on the basis of what I can see today. But more importantly, I see the margin continuing to improve. I hope that helps you.

Chetan Udeshi

So, are you saying second half sales constant versus first half of this year? Is that what you are saying?

Fred Rose

Yes. And actually we wrote it in the press release, but I'm just making sure that it's clear now. But the margin is expected to continue to improve.

Chetan Udeshi

So, compared to first half, improvement in second half?

Fred Rose

Yes.

Chetan Udeshi

And are you going to give any color, I am not sure if you will, on the extent of cost synergies that have been realized to date or you expect by end of this year?

Fred Rose

No, except that I think we're moving away from giving cost synergies to basically giving you the margin. And I think if I look at your model, we're well ahead of what your model and what other analysts have been providing which is we're well ahead. And that reflects to you that we're starting to generate those cost savings at a faster rate.

We will not update the total numbers objective at this point because we have finished phase one of the integration ahead of schedule. We still have obviously G&A actions to be taken. We still have R&D actions to be taken. Those still need to be realized and come through the P&L in the months and year to come. So, obviously as we progress those, we will communicate and give you updates on that.

Operator

And your next question comes from Richard Kramer from Arete Research. Richard, your line is open.

Richard Kramer

Couple of questions for each of you. Fred, for just a follow on with that point on Connected Home, you mentioned the integration of the supply chain. Isn't this something that you would expect to see more in 2017 and beyond or are you telling us that's something that's already contributed to the margin? And equally, given your comments on the pipeline in production services and also on Cinram, are these both going to accelerate materially in sales in second half of the year?

Fred Rose

So, on the first one, the answer, Richard, is yes and yes. They have already started to benefit the profitability and integration supply chain. And yes, obviously we expect more to come, especially given that we have to continue to improve our profitability. In terms of production services and DVDs, yes, given the existing backlog we expect sales to grow very significantly year-over-year and actually, in the case of DVDs, obviously very significantly H1 over H2. And we also expect very significant improvements in profitability in those two businesses in the second half of the year, led by actually volume in some cases and by the maturity of the pipeline on certain orders in the other.

Richard Kramer

Okay. And two quick ones for Esther. On the early repayment of debt, are there any additional costs that you have for that?

Esther Gaide

No.

Richard Kramer

And is that something that you -- we should expect, as you continue to generate cash, you're just going to roll forward the debt -- roll forward the repayment of the debt as opposed to hitting your leverage targets by letting the cash pile up on the balance sheet? And equally, with the working capital squeeze, is that a one-off or is there something that -- you think more can be done in terms of squeezing working capital or might we expect it to reverse somewhat in second half as the volumes would go up in some of your businesses?

Esther Gaide

So, on the first one on the early repayment, we have no cost because we're just at the right moment to repay it with no cost. On the working capital squeeze, as you know we like to work step by step on the working cap with the team. And that's what we've been doing with all the teams. And we have maintained and reconfirm the guidance. So, that means we'll be generating free cash flow in H2 and a little bit more than in H1.

Fred Rose

And then if I can answer the second part of your question on the repayment, as we've made it clear, the objective of the Company is not to sit with hundreds of millions of cash on the balance sheet for no practical purposes generating negative return.

As you know, our objective is to de-lever the Company. And we think an efficient use as we get to that de-lever is to prepay debt and save interest costs which I remind you are about 5% per year. So, that's what we're doing. So, excess cash that is not needed for working capital purposes or to run the Company will not sit on the balance sheet.

Richard Kramer

And maybe one last one just to clarify in production services, since you mentioned the solid pipeline and the awards and so forth and also the addition of capacity. Does your pipeline now stretch into next year? And are these capacity additions something that -- you mentioned the significant growth, but they would have an extension that would go into projects that would run well into 2017 or is the visibility much less than that?

Fred Rose

Particularly in the film market, we have quite significant visibility obviously into next year, because a lot of our film -- we have large film projects which are 12 months long. We also have a view from some customers on long term commitments. So, I feel quite confident that this trend we're seeing will continue. The same thing in animation; we've announced some major wins, including Sherlock Gnomes, as an example which go well into next year or Captain Underpants with DreamWorks which -- all projects which fill up the pipeline for next year.

So, yes, we feel good. We also have with Mr. X quite a lot of work on TV, episodic work which is recurring. And of course once a series is renewed for another season, we know that work is coming. So, obviously the order backlog -- the pipeline is not 100% filled up, for example for the second quarter next year. But if we look at our ratios and our metrics, we're doing very well. And I can just tell you we're going to have a record second half of the year.

Operator

[Operator Instructions]. And your next question comes from Rob Stone from Cowen & Company. Rob, your line is open.

Rob Stone

A high level one for you, Fred, first. Just as you look at the business and markets overall, any comment on sort of upside or downside surprises? I mean, you mentioned in the prepared remarks that MPEG LA was a disappointment but you had strength in the core licensing business. So, just thinking about markets overall, any flavor from the impact of Brexit? That's my first one.

Fred Rose

So surprises, no. Just to talk about the problem children, Brazil, the Brazilian market. But to be frank, if we were to look in on a year-on-year basis, we basically were flat year-over-year over Brazil which means that the decline seems to have reached kind of a natural low point. But we don't see a return to growth for many quarters to come given what's going on there, the economic pressure and so forth.

With regard to Brexit, I'll tell you what the positive impact is. The positive impact is that the British pound fell and suddenly a lot of customers are very interested in talking to us about doing more work in London. The negative we don't know yet. The negative is uncertainty in the medium term, but it certainly will not have a short term impact in our numbers. If the UK economy were to go into recession, obviously it would affect the advertising market, in which we're present through visual effects in London. But, as you know, the biggest part of our business is in North America, but that might have an impact.

Like any other company, we're also looking at contingency planning over the next two years in terms of our supply chain and how things would work were the UK to be outside the European Union. But we think all these things will be manageable, because in some cases we will just relocate certain things within the European Union outside the UK, but this is just contingency planning at this point in time.

Rob Stone

I also wanted to ask you about the timing of the impact of Connected Home wins. You've mentioned a number of good ones and you said that the revenue is going to be roughly flat for second half this year. So, do we see those wins start to bring in an acceleration on the top line as from 2017 or how are they spread out?

Fred Rose

I think most of the wins we've communicated, maybe one exception, is that they are all long term wins on complete new product categories which really are 2017, 2018 where we basically are creating a new backlog for the future generational shifts of technology.

Rob Stone

You mentioned that your goal was to have high quality revenue as opposed to chasing deals in a price war. Are you seeing much of that? I mean, how should we interpret that comment, as a strategic one or a tactical one?

Fred Rose

No, I think what it means is it's just imposing the discipline in our teams to make sure that, as we bid, we don't bid against ourselves or bid against shadows which is to basically focus on that. Obviously, there are some markets that are special. China would be a good example. We're making sure that any business we do in China is -- meets those profitability levels.

We have not seen -- I mean, what we see, the large players, I mean, everyone is fighting very hard. But at this point in time, our customers are working very hard at trying to get the benefit of cost synergies that they think we might get, but our number one rule is to make sure that we're improving our profitability.

Rob Stone

A couple of questions for Esther. One is any color you could provide on the taxes which seem relatively high as against the pre-tax amount, I guess maybe there were some costs that were not deductible for taxes and any comment on how we should think about the full year tax rate. And my second question for you is on restructuring charges, whether you have a view on what that might be at for a level in the second half. Thanks.

Esther Gaide

Okay. So, on the taxes, it's the same level than last year. We have a slight change in the countries, but we will not expect to have any kind of change in the tax rate in those countries. We're working on that, but it's something really -- a long term work to work around transfer pricing initiatives. On the restructuring, we have been taking the major impact in H1. Why? Because we have been adjusting the restructuring, the technology costs, to the decrease of the revenues. And the main impact was in H1, so we should have a decrease in H2 on that.

Operator

And your next question comes from Andrew Humphrey from Morgan Stanley. Andrew, your line is open.

Andrew Humphrey

Just a couple of quick ones from me. I think you've probably given us enough information to have a kind of reasonably well educated guess at this, but can you quantify in absolute terms of integration costs you faced that were associated with Cinram in the first six months?

And the second question is, I mean, you call out an increase in capitalization of R&D in the press release. At a couple of percent of revenues overall, that looks still fairly modest. But could you give us a bit of guidance on where you would see that stabilizing in the medium term?

Fred Rose

Yes. Your first question, Andrew, on Cinram is a difficult question to answer, because I'm very cognizant that we have a few clients who actually listen to the recordings of this call. So, let me put it this way. The Cinram acquisition contributed a material negative EBITDA for DVD services in the first half of the year which we obviously do not expect to -- which, as I said, not only will not be reiterated in the second half, but in the second half that activity will be materially contributors. But I do not want to give you something that would guide my two clients with too much information, if you allow me.

Andrew Humphrey

Okay.

Esther Gaide

And on the second point on the R&D capitalization, it's only related to the change of scale of Connected Home. It's 100% that. It was change of scale in Connected Home. We have been growing the business by nearly two, so that's it.

Andrew Humphrey

And could you say, as a percentage of Connected Home revenues, what that should be in the midterm? Is it in line with first half levels or somewhere else?

Fred Rose

The answer will depend on the new customer wins and the complexity of new projects we win. But there is absolutely no change in the way we do this, so --.

Esther Gaide

It's directly linked, yes.

Fred Rose

Yes.

Andrew Humphrey

Okay. So, it sounds like we could see it tick up a bit as you win new customers.

Esther Gaide

Yes.

Operator

And your next question comes from Eric Beaudet with Natixis. Please ask your question, Eric.

Eric Beaudet

A quick question on the technology. I'm pleasantly surprised by the strong growth of your non MPEG licensing. I am just trying to get a better feel of how should we see that, these contracts, heading into 2017, 2018. If I remember correctly, some of that growth comes from a one-off payment you signed earlier this year on HDR which was something like €25 million. I was wondering if the rest of the growth was such as these one-off payments, i.e., your technology revenues will go down substantially next year or is this strong growth also driven by recurring licensing deals which means that you can maintain your technology revenues going into 2017 and 2018? Thank you.

Fred Rose

So, I know you are trying to get me to say something that I have never said before, so I'm going to be very careful. Obviously, all license deals have a mix -- most of the license deals have a mix of recurring and one-offs. When they are material one-offs, we tell you like we did in the first quarter. In that deal, that was an HDVC deal. What we've also indicated is that this position us well to sign additional new HDVC deals which generally speaking our objective will be not to sign lump sum deals but to sign annuity deals.

Two examples of recurring deals which have -- are on televisions. We announced deals in the first half. We announced the set-top box deal. Those are examples of just recurring license deals.

But the reality is, in the mix of the day-to-day business, we will continue to see obviously a mix of it. And every year we should have some lump sum payments, usually for the past, by the way, but that's the way it's always been and it should not change any particular views.

Operator

[Operator Instructions]. And your next question comes from Rich Kramer from Arete Research. Rich, your line is open

Richard Kramer

Just to try to put the math together on this, the €50 million that you set aside for CRT and the restructuring that you've got in the second half, I mean, is that all going to be cash out in the second half? Because I'm struggling with how, if you have your -- hit your free cash flow targets, why you aren't substantially better than the 1.4 times leverage target you've laid out for us. Maybe, Esther, if you want to walk us through the math of what will go out in the second half alongside the incoming from the free cash flow you've guided?

Fred Rose

So, we will this year pay--

Esther Gaide

So, this year we will pay €46 million on the cathode ray tube litigation. And that has been included in our forecast and then on the restructuring, as I was mentioning before, we already have been going through that exercise and most of it has been paid for the technology restructuring. And, I mean, that -- we're just -- the only thing on the technology side is that we've been paying -- closing things before. So, that's already been taken into account in H1. H2 should be straightforward.

Fred Rose

Yes, we will have, as usual, restructuring which is now DVD services continued restructuring for a few million. Connected home will continue its implementation plan which will probably cost a few million. And -- but we're not talking about the level we've seen in the first half of the year. And then on the free cash flow maybe, Richard, since we cannot look at your sheet, how you're calculating, I can assure you we're reconfirming -- we're reconfirming, confirming and stating unequivocally that we will meet our free cash flow objective.

Richard Kramer

And just for some of the previous questioners, can you confirm that's not going to involve any sort of asset disposals like patent sales or anything else that you're baking into as one-offs in the second half of the year?

Fred Rose

There are no one-offs in the second half of the year, no. I mean, there is nothing that I know of. If there is something that comes up, then we'll tell you at that point. But right now there is nothing we're aware of.

Operator

And we have another question from Chetan Udeshi. Chetan, your line is open.

Chetan Udeshi

Yes. I had follow up questions on Connected Home, actually. So, you've mentioned a new win in the U.S. for OTT box. Is this with the -- essentially is this a completely new win at a new customer or is this supposed to be a replacement for existing terrestrial or cable box with new OTT box in the future? So, I am just trying to gather whether this is more incremental stuff or maybe cannibalizing your own--

Fred Rose

Chetan, going to help -- I'm just going to help you and tell you it's a new customer, but you're not going to find out anything more from me.

Chetan Udeshi

And second question is when you say second half flat versus first half, historically seasonality is -- second half is always somewhat better than first half. And if my math is not wrong, if I take second half as same first half, it would imply 7% decline from pro forma levels last year of the combined Group. So, I know you've highlighted some wins which will ramp up through 2017, but overall how do you see the revenue trajectory in Connected Home in second half? Why is it somewhat below seasonal at this point? And how do you see that ramping through 2017 in terms of design wins and contribution? Thanks.

Fred Rose

Okay. So, making it straightforward, we have two major customers who are going through integration processes and which are very complex, particularly one that just closed very recently. And we're just being -- I think we're just being cognizant of the fact that these things take longer than people expect and that this could have an impact. The other comment I would make is that -- and that's more maybe a midterm view to get to that, is we do expect to continue to grow faster than the overall market. I'll make that statement.

So, if the market were to grow faster than we think it is right now in the second half, we would expect to obviously benefit from it. But right now, given what we're seeing in terms of the integrations going on of these different companies, we think that it's prudent not to bet on the usual flip in the second half of the year at this point in time.

By the way, the other comment I would make is on the historicals of Cisco Connected Devices. You know these are unaudited numbers. We've already talked about this. And just it's very difficult for me to look at this. So, the best we're looking at now is market share and wins and so forth. And I know that some reports will be coming out probably in the next two to three weeks from analysts covering all the companies in terms of market share and we expect to look pretty good in that context.

Operator

There's no more questions at this moment. But as a final reminder, it's star-one, ladies and gentlemen.

Fred Rose

Thank you very much, but I think we will conclude at this point. And I wish all of you who will take a day or two of holiday in August to enjoy it. And Esther and I look forward to seeing most of you in the weeks ahead. Thank you very much.

Esther Gaide

Thank you very much.

Fred Rose

Bye, bye.

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