OpenTV Corp. Q4 2007 Earnings Call Transcript

OpenTV Corp. (OPTV)

Q4 2007 Earnings Call

February 21, 2008 5:00 pm ET

Executives

Mark Beariault - General Counsel

Ben Bennett - Chief Operating Officer, Acting Chief Executive Officer

Shum Mukherjee - Chief Financial Officer

Analysts

Ali Mogharabi - B. Riley & Company

Todd Mitchel – Kaufman

Murray Arenson - Ferris, Baker Watts

Presentation

Operator

Good day ladies and gentlemen, and welcome to the fourth quarter 2007 OpenTV Corp. earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Mr. Mark Beariault, General Counsel.

Mark Beariault

Good afternoon and welcome to OpenTV’s fourth quarter and full year 2007 financial results call.

I’d like to remind you that during this call, members of OpenTV’s management, in addition to discussing the actual results of this past quarter will be making forward-looking statements. These forward-looking statements are based on our current expectations and beliefs and are subject to a number of factors and uncertainties that could cause our actual results to differ materially from those described in these forward-looking statements.

For example, statements regarding forecasted growth of the markets for our products, our ability to expand our product offerings and distribution, our ability to maintain the momentum in our revenue growth and to achieve positive net income and our financial guidance for 2008 are all forward-looking statements.

For a detailed discussion of the factors and uncertainties that could cause our actual results to differ materially from those described in these forward-looking statements, please refer to the risk factors described in our Form 10-K filed with the Securities and Exchange Commission and any updates to those risk factors contained in our quarterly reports on Form 10-Q, and the other documents that we file from time to time with the SEC.

Those documents and reports can be viewed on the Investor Relations page of our website. We undertake no obligation to update or revise any of our forward-looking statements, whether as a result of new information, future events or otherwise.

In addition, during this call we will also refer to certain non-US GAAP financial measures, such as adjusted EBITDA and billings, which management believes are helpful in understanding our business and performance. We’ve included a reconciliation of those measures to US GAAP measures on the Investor Relations page of our website. We will also make available a webcast replay of this conference call on our website.

With that, I’ll turn the call over to Ben Bennett, Acting Chief Executive Officer of OpenTV.

Ben Bennett

Thanks, Mark and welcome everyone to OpenTV’s fourth quarter and full year 2007 earnings call. Joining me on the call today is Shum Mukherjee, Executive Vice President and CFO.

2007 was an important year of transition for OpenTV. During the year we refocused our strategy on growing our core businesses and ensuring that we have the engineering processes, organization and financial discipline in place to achieve our goal of sustained profitability. This year required the company to make some difficult decisions in the past six months but we are confident that these decisions will bear fruit for our shareholders, customers and staff alike in the medium to long term.

Let me give you a brief summary of the headline results. For 2007, we met our revenue guidance with revenues of $110 million, a 16% increase over 2006. In addition, we significantly improved our net loss from a loss of $10.8 million in 2006 to a loss of $5.2 million in 2007.

Our results for the fourth quarter of 2007 include revenues of $38.2 million, billings of $27.8 million and net income from continuing operations of $12.3 million. Shum will provide additional details later in the call.

So looking ahead, we have sharpened our focus on growing our middleware and advertising business with specific emphasis around standard product offering. Both of these businesses are profitable on an EBITDA basis and enjoy good growth potential. Middleware billings continue to grow at 15% per year and are a significant contributor to overall cash flow.

I want to highlight some of the changes we have made that will have a positive impact on the business moving forward. First, we’ve simplified our operating structure by reorganizing from eight lines of business to two primary reporting segments, namely middleware solutions and advertising solutions. Second, we have removed unprofitable non-core businesses such as PlayJam, NASCAR and BettingCorp.

Third, we have implemented clear P&L accountability within the organization and have taken a number of cost reduction and control steps particularly around headcounts and subcontractor expenses.

Fourth, we’re actively implementing a third-party middleware distribution strategy that is intended to expand the OpenTV ecosystem of partners. A successful example of this is our collaboration with Nagravision with whom we have won four new networks within the last six months alone, including our latest win in Portugal with TV Cabo, a sizable network operator with over 1.5 million subs.

And lastly, we have recently set up a companywide project management office aimed at driving consistency in our global project management standards and operating procedures.

Within our middleware business we continue to focus on the timely deliver of an innovative roadmap. To that end, our focus is on delivering robust standard-definition high-definition platforms that support time-shifted content through PVR, on-demand content in forms of push-pull and real-time streamed video-on-demand, hybrid networks utilizing broadband IP return path, and connectivity to third-party USB devices that consumer can use for music, photos and even remote PVR functionality.

Many of our customers are embracing these features such as News Corp and Liberty Global, as well as some of our new customers such as Reliance in India, NET in Brazil and our most recent customer win, TV Cabo in Portugal. I also want to highlight that we are making good headway in extending our strategic relationship with the News Corp group in general as evidenced by our recent announcement with SKY Italia.

Within our advertising business we are seeing an increased interest for advanced advertising solutions. These include the campaign management solutions for video-on-demand, PVR, interactive and addressable advertising, as well as tools for altering and delivering advanced advertising content. We believe the market opportunity for advertising solutions is a significant one for OpenTV.

Television spend in the US alone is $70 billion. But there are a number of increasing threats to those dollars through new media outlets like the Internet and mobile as well as time shifting technologies such as the PVR.

In the middle of 2008, our recently announced EclipsePlus product will be commercially available for deployment. This is an important master in the evolution of our campaign management solution that addresses key areas of functionality like web services, as well as significant performance improvements that should create operational efficiencies for our customers. It also laid the foundation for additional features and support non-linear advertising in subsequent releases.

Although the majority of our revenues from advertising are currently generated from our campaign management product, we are actively exploring new initiatives and technology that builds on our experience in the area of addressable advertising. We have considerable hands on experience, technology and intellectual property in this area, which should provide a significant competitive advantage for the company moving forward. We intend to use our expertise in technology to help our customers worldwide.

I now want to update you on a recent development regarding our efforts with Time Warner to deploy middleware solution on the legacy set-top boxes in the field. The original goal of this program was to provide a common user interface and interactive services platform across these older set-top boxes.

As we have discussed in prior calls, this program has suffered from significant delays due in part to the numerous changes in scope particularly around the technical capabilities of the low-end legacy set-top box from Motorola. Recently, OpenTV and Time Warner completed a joint evaluation of the goal and the launch timing of this program. This evaluation caused us to take a hard look at the economic model from a return on investment perspective.

Given the delays in the schedule for commercial deployment our projections of the number of legacy set-top boxes in the field at launch has decreased significantly, which has adversely impacted our revenue projections. Likewise, the drain on OpenTV and Time Warner resources has been higher than either party anticipated. Hence, after much discussion, OpenTV and Time Warner have jointly decided to put this program on indefinite hold.

We’re also disappointed that the original goal and economics of this deployment may not be realized. This is absolutely the right decision for the company. Our commitment to grow the company from a solid, profitable platform must not be undermined. And we simply cannot justify a loss-making program of this scale without reasonable assurance of future profitable returns.

Time Warner revenues were not included in our 2008 outlook which means this decision will not have a meaningful impact on our 2008 guidance that Shum will provide on the call here today.

Our long-term global outlook to middleware, growth remains healthy as our biggest growth opportunities to middleware are in emerging markets such as India, China, Eastern Europe and Latin America, as well as our more developed markets in EMEA and Japan.

I do want to insight here on the call that our relationship with Time Warner remains strong. Indeed, we are actively exploring new initiatives with senior executives at Time Warner, simply around areas such as the support of their OCAP or through two-way program. Indeed, these efforts are consistent with our participation in and support of the cable ads OCAP standard.

More generally, I want to reiterate our continued commitment to developing business in the North American cable, satellite and telecom markets for our middleware and related head-end products and also our advanced advertising suite of products. Our continued relationships with companies such as Comcast, EchoStar, Time Warner, Bell ExpressVU, Star Choice and Innovative Systems are important references for the company.

Let me now discuss some key trends that we expect to positively impact OpenTV’s business in 2008 and beyond. First, growth in digital TV continues and we expect the analog switch-off in many countries to fuel this growth. As a result, our middleware business continues to show momentum on the customer front in several areas, but particularly some of the rapidly growing emerging digital television markets mentioned previously.

Second, traditional pay TV markets are seeing increased competition, and are deploying much more advanced digital solutions to support services such as HD, time-shifted TV and connected devices. Middleware is a key component in rapidly launching and supporting these new services.

Third, end-to-end turnkey solutions are critical for penetrating emerging markets where customers demand both a commercial one-stop shop and off-the-shelf pre-integrated solutions. Our third-party distribution strategy will help us address the requirement and we are confident that the synergies with companies such as Nagravision around an integrated product roadmap will bear fruit for OpenTV in the near future.

Fourth, we continue to renew contracts with existing customers and have begun upselling and migrating many of our existing customers to our fifth generation middleware including customers such as [NTA] in South Africa, DIGITURK in Turkey, Austar in Australia and others that we expect to announce in the near future.

And finally, significant advertising dollars are shifting from traditional TV to other forms of media. This is driving an urgent need for advanced technology solutions that can help stem this flow particularly in the US where broadcasters and operators are feeling the pressure. OpenTV is actively engaged in addressing this need in close collaboration with its customers such as Comcast and Time Warner.

In summary, we believe a newly organized OpenTV has a great opportunity ahead in both its middleware and advanced technologies. When you consider that of the 1.8 billion television households in the world today, only 10% are estimated to be digital. You can see there is significant growth opportunity. Some of this growth will be driven by new digital network launches in emerging markets and some by the analog switch-off that is taking place in many countries around the world.

Financially we’ve been generating positive cash flow now for three years. The fourth quarter of 2007 was one of our best quarters ever in terms of cash flow. Today we have over $95 million in cash, no debt, and importantly our management team committed to controlling costs tightly and achieving steady but scalable and profitable growth.

Last but not least, I am extremely proud of our announcement earlier this week that we surpassed a significant industry milestone of more than 100 million OpenTV enabled digital devices worldwide. This is a tremendous milestone for the company and illustrates our continued leadership with over a 58% share of the worldwide market for middleware.

However, it’s not lost to me or indeed our shareholders that creating a growing, scalable and profitable business based on this success is of absolute paramount importance.

With that, I’m now going to turn the call over to Shum to review our 2007 results and outlook for 2008.

Shum Mukherjee

Thank you, Ben and good afternoon everyone. I’ll first discuss the PlayJam sale, then talk about Q4 and full year 2007, and finally give guidance for 2008.

We completed the sale of our PlayJam unit in December to a private company based in London. Consideration for the sale included an initial cash element of $225,000, an ongoing equity interest of 19% in the acquirers, and contingent consideration of up to approximately $5.7 million based upon the acquirer’s achievement of certain income metrics and realization of net operating losses for tax purposes.

We recorded only $225,000 as income due to the contingent nature of the remaining consideration. This income was offset by the carrying value of the assets resulting in a loss of $5.2 million, which is being recorded as a discontinued operation in 2007. All historic PlayJam related revenues and costs have been reclassified as a discontinued operation.

With the closure of this sale, we have also restructured our reporting segments into middleware solutions and advertising solutions. The units that were previously part of the application and BettingCorp segments now form the basis of the new advertising solution segment.

Billings in Q4 ‘07 were $27.8 million, 5% over Q4 ‘06 reflecting a $2.9 million or 13% increase in middleware billings primarily driven by increased billings to UGC. The increase in middleware billings was partially offset by lower billings of $1.3 million in the applications and participate product lines.

Revenues in Q4 ‘07 were $38.2 million, up 52% over Q4 ‘06 primarily driven by the recognition of $10.8 million of previously deferred revenues related to UGC. Excluding the impact of UGC, Q4 2007 revenues are up 5% compared to Q4 2006.

Net income from continuing operations in Q4 ‘07 was $12.3 million compared to a loss of $3.5 million in Q4 ‘06.

There were three unusual items impacting net income in the quarter. First, as Ben mentioned OpenTV and Time Warner made the joint decision to put our middleware project indefinite hold and as a result we expensed, in Q4 ’07, $2.2 million of previously capitalized costs related to Time Warner.

Second, we recorded a gain of $1.7 million related to the sale of a cost investment in a private company called Health Hero Network and a gain of $1.5 million related to the settlement of the Liberate litigation.

And finally, we recognized the remaining balance of deferred UGC revenues, which increased revenues by $10.8 million and net income by $8 million. Excluding these unusual items, net income in Q4 ‘07 would have been $3.8 million compared to a loss of $3.6 million in Q4 ‘06.

Full year billings were $108.4 million, $10.2 million or 10% over 2006, reflecting gains of 16% and 23% respectively from our middleware and advertising product lines, partially offset by declines of $1.7 million from our applications product line and $2.3 million from our betting and gaming product line which we closed in 2006. Full year billings were $6 million below the midpoint of our original guidance for 2007 reflecting delays in implementing certain projects.

Full year 2007 revenues were $110 million, $14.8 million or 16% over 2006 full year revenues reflecting gains of 23% and 17% respectively from our middleware and advertising product lines partially offset by decline from our applications, participate and betting and gaming product lines. Full year revenues were equal to the high end of our original guidance for 2007.

Full year net loss from continuing operations was $300,000 compared to a net loss of $10 million in 2006. Also net loss from continuing operations for 2007 was better than our original guidance for 2007.

Cash generated from operations was $16.6 million in 2007 driven largely by EBITDA of $8 million and improvements in working capital. Our cash portfolio on December 31, 2007 was $81.8 million compared to $65 million on December 31, 2006. Also, we recently received $14.3 million from Liberty representing the final portion of their capital contributions. Accordingly, our cash balance is currently over $95 million.

Deferred revenue at the year-end 2007 was $24.1 million slightly below deferred revenue of $25.6 at year-end 2006.

I’d like to wrap up the 2007 discussion by summarizing a few key points about performance and actions we are taking to improve profitability then I’ll close with our guidance for 2008.

Clearly 2007 was a year with a number of unusual items. But let’s step back for a moment and consider a few metrics based on the last three years. We continue to maintain our market leadership in the middleware segment. More than 100 million OpenTV enabled digital devices have been shipped by more than 50 network operators and more than 40 manufacturers.

Our average billings growth has been 20% a year between 2003 and 2007. We have generated positive operating cash flow in each of the last three years compared to operating cash flow losses of $16 million in 2004 and $42 million in 2003.

We have restructured the company to move from eight lines of businesses to two primary reported segments and have eliminated many of our loss-making businesses like BettingCorp, NASCAR and PlayJam. We believe these actions will enable us to deliver products quicker and at lower costs and will also enable us to reduce the timeline between winning an order, launching the product and recognizing revenues.

Looking ahead into 2008, our expectations of are for full year billings to be in the range of $122 to $132 million representing a growth of between 13% and 22% over 2007. Full year 2008 GAAP revenues are expected to be slightly down to flat in the range of $105 to $115 million with a midpoint of $110 million.

Our key goal in 2008 is to be net income positive for the full year and to focus our sales, marketing and delivery efforts around long-term growth for our strategic middleware and advertising segments.

Net income is expected to be a moderately negative loss in the first half of 2008 and to be between break even and slightly positive for the full year 2008.

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

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from the line of Ali Mogharabi - B. Riley & Company.

Ali Mogharabi - B. Riley & Company

This can’t continue every quarter, recognition of the deferred revenues. Can you give me some more detail on your relationship with Time Warner, Ben? Are you active with those guys on the advertising front as the word around that you also are with Comcast?

Ben Bennett

The relationship with Time Warner Cable is actually very good in both segments, both the advertising and the device set-top side, but certainly on the advertising. Without getting into too much detail, but I think you saw we delivered our EclipsePlus beta release to US cable.

That was delivered on time. And a key point for the company from about six month ago, we made a commitment we were going to deliver the next version of the EclipsePlus and we delivered it actually on the day. And which was sort of noted by both Comcast and Time Warner.

And the relationship continues to grow in the advanced advertising sector, not just around our campaign management but the advanced features that US cable really need to focus on in the near future.

Ali Mogharabi - B. Riley & Company

Going back to Time Warner again regarding the middleware which you described in detail and to be honest with you not really that surprising, but I’m wondering, what has been the response to why not deploy the middleware on the more advanced set-top boxes?

And we’re not just talking about the Motorola boxes but also the Scientific Atlanta. I guess I am trying to get an idea of do you think that you still have an opportunity to get in there with your middleware in addition to of course the advertising presence that you have?

Ben Bennett

Yeah, I think that’s somewhat premature. The legacy side was obviously a deal that, in fact all of our deals worldwide are predicated on shipping on new boxes not just the legacy. The US cable market as you move to OCAP, we’re part of that OCAP licensing pool, so every box shipped we take a license fee for those boxes.

Time Warner Cable, Comcast are having some challenges around the integration activities of through two-way. Just pretty similar to what OpenTV has been doing for number of years around the globe. So, I do see a need to engage, in fact that’s why we’re talking at the highest levels of how we can help.

But the Timer Warner decision was a joint decision but on one side we can’t say whether we’re going to be a profitable, healthy, sustainable company and then not take hard decisions. We just cannot afford to get our self into loss making. I mean I think our shareholders will understand that.

Ali Mogharabi - B. Riley & Company

I’ve seen the press release. All of us have seen press releases regarding your latest win by partnering up with Nagravision. Can you give me an idea just how much, I don’t know if I’m using the right word here, but control Nagravision has over the new contracts that you signed? When partnering with those guys to get the new clients do you have a say about the pricing of your middleware in those contracts? Or is it basically what Nagravision wants to do?

Ben Bennett

No, absolutely. What we’ve done is tried to structure. It’s not just Nagravision. It’s Aderto and other partners that we’re structuring third-party distribution agreement. I think when we talked before what OpenTV needs to do in the medium term and long term, we’ve see the urgency, is to make sure that we grow our fee system

, meaning it’s not just OpenTV selling, but having our partners sell. And the other key thing is this framework, it could be that these partners take on the prime integrator role and OpenTV takes a product role. We deliver them product and support and if the TV Cabo announcement is exactly that model, Reliance is exactly that model.

And In fact, if you look to DIGITURK in Europe with Aderto, Aderto with a prime integrator, and what that does to us as a company is reemphasizes our intention to be product orientated and not just services and product.

The framework agreement that we have in place that we’d be announcing soon in terms of, with our partners structured that agreement around the pricing. So this is a middleware pricing for those third parties, but that would apply equally to some of our other partners such as Aderto and other CA or system integration companies that we’re going to be talking to in the near future.

Ali Mogharabi - B. Riley & Company

This framework that you just briefly described it applies to Kudelski’s Nagravision as it does to any other partner that you currently have, correct.

Ben Bennett

Correct.

Ali Mogharabi - B. Riley & Company

Regarding the case between TiVo and DISH the legal battle that these guys continue to have will that impact you in any way from a whether a positive or negative standpoint? And also, would you in any way be a liable party in this?

Ben Bennett

I don’t believe so. And I’ll look into my General Counsel who may be able to add a little bit more flavor on that.

Mark Beariault

Yes, as you may know that is not our PVR technology in DISH. So, to our knowledge we’re not implicated in that.

Ali Mogharabi - B. Riley & Company

But now on the legal side any other legal issues?

Mark Beariault

Nothing to update at this point.

Operator

And your next question comes from the line of Todd Mitchel - Kaufman.

Todd Mitchel - Kaufman

In the $0.09 you cited about $5.5 million in benefits. You have the Time Warner Cable reversal, the gain on the sale and the settlement. And then you said you had a $2.2 million loss on discontinued operations. Are all of those three positive items in that $0.09 and then the $2.2 million not in the $0.09? Am I looking at a discontinued operation number?

Shum Mukherjee

So the $5.2 million equates to a loss of $0.04 and that compares with a loss of $10.8 million or $0.08 per share. So, that’s the bottom line.

Todd Mitchel - Kaufman

No, but in this quarter’s numbers you said that the numbers included the Time Warner Cable, the gain on the sale and settlement. Is that all in this quarter’s $0.09?

Shum Mukherjee

Yes.

Todd Mitchel - Kaufman

And the loss on discontinued operations as a result of the sale of BettingCorp not in that $0.09?

Shum Mukherjee

Yes, the loss is not in the $0.09. If you look at what we said in the press release, from continuing operations is $0.09 and the loss is $0.01, so the net income is $0.08.

Todd Mitchel - Kaufman

Looking at your guidance for next year and looking at the cost items this year, is there anything in costs of goods sold associated with the incremental revenue recognized from UGC?

Shum Mukherjee

Yes, so when we recognized $10.8 million of revenues as we had also capitalized $2.8 million of costs, so that also got expensed with the recognition in revenues.

Todd Mitchel - Kaufman

Because what I’m sighting is this quarter you had what amounts to 1,000 basis points drop in costs of goods sold. Is this, looking at the lines of business, what the gross margin should look like going forward?

Shum Mukherjee

No. There were as we said some unusual items in the gross margin. One unusual item that’s reflected in the costs of revenues this quarter, for instance, is the $1.5 million gain on the Comcast settlement. So, that certainly will not be the case going forward.

Todd Mitchel - Kaufman

Okay and is that basically the one item the biggest thing that throws everything off?

Shum Mukherjee

Yes, that’s the one item in the cost of revenues that’s unusual. Of course there are other unusual items in the income statement, which I mentioned earlier on.

Todd Mitchel - Kaufman

In terms of your guidance going forward, if I look at this loosely from what you said at the end of the third quarter, other than sort of the jiggling of the numbers for revenue recognized in the fourth quarter that previously might have been recognized next year, is there any change here fundamentally?

Instead of looking at next year for one year, but if I was to look at the five quarters including this December from what you said in the third quarter, has there been any change here in the guidance?

Shum Mukherjee

No, there’s no change. The only real change is that we have reiterated the guidance on net income. And as we said our key goal in ‘08 is to be net income positive for the full year so that’s really the change from what we had said earlier on.

Todd Mitchel - Kaufman

The only other items that if I look at the P&L, it looks like you had a pretty decent sequential drop in both sales and marketing in G&A. Does that reflect a change in the business mix and are these sort of levels that we should look at going forward?

Shum Mukherjee

Yes, we should pretty much look at these levels going forward, especially if you look at the fourth quarter. If you look at the full year, of course the G&A has some unusual items that we mentioned in Q3 and for instance it included severance of $2 million. But Q4 is pretty usual.

Todd Mitchel - Kaufman

You said in regards to writing these deals with Nagravision, you’ve given us that there’s one in Portugal but you cited four. Can you tell us where the other three are?

Ben Bennett

Yes, it’s TV Cabo in Portugal, Reliance in India, Cable Digital in Belgium and one other, Todd that I can’t announce yet.

Todd Mitchel - Kaufman

Can you talk about your relationship with EchoStar and how it seems that that was an in a bit of flux, have you sort of nailed down that relationship a little bit? But also it would be interesting to hear your take on what the division and the creation of their sats business means their set-top box business might mean to you.

Ben Bennett

Actually I met with Mark Jackson and that management team about three or four weeks ago. That was actually my first meeting because I’ve been in Europe. It was a pretty good meeting.

Without getting too carried away, we had sort of three areas of work. We’ve just been working with them and we continue to work with them on their interactive applications strategy. And I think they were pretty pleased with our participation TV products and we used it for voting.

It’s a really interesting application where people are voting based on election results, election questions. And they didn’t market it at all, but there was a lot of response. It’s quite a motive thing. And so that went down well and they’re looking to use that interactive platform elsewhere.

I think on the advertising we have some good opportunities, not across areas the interactive advertising that we’ve done previously. They want to exploit some of our expertise in that area and also actually in the campaign management side. However that may be getting a little ahead of ourselves.

An interesting one, which should fit well with our corporate interests, is EchoStar wants to expand their footprint worldwide. And they’ve got a good set-top box business and they got great engineering talent and operational expertise. And they want to sort of work closely with us on the international scene. And that fits in with our longer term plans with EchoStar because we obviously like to move them to next generation middleware and obviously that’s being sold worldwide to our international customers.

So, I’m hoping the two companies can cooperate more internationally as well. So, we had a good meeting. We’ve obviously got a lot of follow-up to do, but I think the relationship’s pretty good.

Todd Mitchel - Kaufman

You did mention that you feel more confident in your relationships with the News Corp platforms and we saw the announcement with SKY Italia. Is there some kind of update that you might want to give us on BSkyB and their projects going forward?

Ben Bennett

So for News Corp, yes, I think generally we’re making some very good progress. We spent a lot of hard work over the last 6 to 12 months from a sales marketing and educating a lot of the entities, the assets on some of our core plans roadmap over the next two to three years.

In fact OpenTV group is attending big News Corp Meeting in Sydney next week to present OpenTV plans and roadmaps. And that’s part of the big News Corp group and we’ve been invited so that’s a good sign.

SKY Italia, we made that announcement and that’s an important announcement. With BSkyB I don’t want to get too ahead of ourselves on that, but I think you’re well aware of some of that Darwin initiatives but there’s some good discussion about the OpenTV fifth generation middleware. And to be honest that’s as far as I can really go on today.

But we’re meeting with BSkyB on a regular basis. We have a strong support team in London. BSkyB were actually in San Francisco only a month or so ago, management visiting us and I’ll be meeting with them with some of our team in March.

I’m sort of pretty confident on News Corp relationship. We obviously have a great relationship with FOXTEL in Australia, which is sort of a pioneer using OpenTV technology moving forward. So, all-in-all, I think we have a good strategic partnership and I’d say more strategic than it was 12 months. Let me put it that.

Todd Mitchel - Kaufman

Any thoughts on this large cash balance?

Ben Bennett

It’s good that we’re cash flow positive and that we’re generating cash. I feel like we’re stuffing it in our pockets trying to hide it. But I think we’re as healthy as we’ve been operationally generating cash. We obviously have a big cash portfolio.

I don’t think I should really get into what we are going to do with that unless Shum, the CFO, has any ideas. But we have a Board meeting coming up over the next few days and strategically we’re focused on the two lines of business. And you already know advertising is the important long-term initiative as well as middleware. So, hopefully we will have some updates in the next call.

Operator

And your next question comes from the line of Murray Arenson - Ferris, Baker Watts.

Murray Arenson - Ferris, Baker Watts.

I wanted to ask you maybe to give a little bit color on what remains of deferred revenue and if there are any significant pieces of that or if there’s anything we should be aware of looking at the outlook for this year or beyond?

Shum Mukherjee

Deferred revenue at the end of December was $24.1 million, slightly below end of December ‘06. And that includes two large items. One is FOXTEL is about $8 million and the other is DISH TV. Of the $24 million about $15 million is short-term, meaning that we expect to convert that into revenues in 2008. And the balance $9.1 million is long term.

Murray Arenson - Ferris, Baker Watts.

Is that something you’d expect like we saw with UGC here where it shows up one quarter, more likely in the back half of the year?

Shum Mukherjee

No, we do not expect any UGC type of cliff effect. The short term will be spread pretty much through the year.

Murray Arenson - Ferris, Baker Watts.

When you were talking about cost of revenues earlier there’s essentially no costs on the P&L this quarter for the royalties and licenses. Is that Comcast offset that’s causing that?

Shum Mukherjee

Yes, exactly, there’s about $1.6 million offset by the $1.5 million gain from Comcast.

Operator

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

Ben Bennett

I think the OpenTV is in pretty good shape. I’ve been with the company for a number of years and I think operationally pretty sound, growing in the logical strategic direction. I think we had some great prospects in both those lines of business, both in the US and internationally. So looking forward to progress this year, on that, we’ll close the call.

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