Executives
Mark Beariault – General Counsel
Ben Bennett – CEO
Shum Mukherjee – EVP and CFO
Analysts
Ali Mogharabi – B. Riley & Co.
Todd Mitchell – Kaufman Bros.
OpenTV Corporation (OPTV) Q1 2008 Earnings Call Transcript May 6, 2008 5:00 PM ET
Operator
Good day ladies and gentlemen, and welcome to the first quarter of 2008 OpenTV Corporation earnings conference call. My name is Jeremy, and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. We'll be facilitating a question-and-answer session towards the end of this conference. (Operator instructions) At this time, I'd like to turn the presentation over to your host for today's call, Mr. Mark Beariault. You may proceed, sir.
Mark Beariault
Thank you, Jeremy. Good afternoon, and welcome to OpenTV's first quarter 2008 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 Exchanges 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 also be viewed on the Investor Relations page of our website. We undertake no obligation to update or revise any forward-looking statement whether as a result of new information, future events or otherwise.
During this call we will also refer to certain non U.S. 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 U.S. GAAP measures on the Investor Relations page of our website. We'll also make available a webcast replay of this conference call on our website.
With that I'll turn the call over to Ben Bennett, Chief Executive Officer of OpenTV.
Ben Bennett
Thank you Mark, and welcome everyone to OpenTV's first quarter 2008 earnings conference call. Joining me today is Shum Mukherjee, Executive Vice President and CFO. During the first quarter, OpenTV reported solid revenue and net income putting us firmly on track to meet our financial objectives for the full year. We remain focused on growing our core businesses and reaching sustainable profitability. Our results this quarter, revenue of $33.8 million and a net income of $6.3 million demonstrate that we are on the right path. The first quarter benefited from tight operational cost control and successful closure of some of our pending contract negotiations with key customers. Our performance in the quarter provides solid start for the year. From a big picture perspective, we anticipate net income to be break even to slightly positive for the full year. This is a goal to which the management team is fully committed and one that we aim to be sustainable moving forward.
Let me now turn to review some of our current business activities. As announced on the last call we reached a major milestone at the end of 2007 with 100 million OpenTV-enabled digital devices deployed worldwide. We continue to build on this strength by expanding our business with existing customers as well as acquiring new customers. We are pleased to report that as of the end of Q1 the number of OpenTV enabled devices is now more than 106 million. This footprint is spread across more than 50 customers around the world with a strong mix among satellite, cable, and terrestrial markets. In addition, we continue to equip our customers with the solutions they need to address the growing market demands for advanced markets such as PVR, High-Definition TV, Video-on-Demand, advanced user interfaces and other new and emerging digital technologies.
With approximately 58% of the worldwide middleware market, OpenTV is the market leader in middleware deployments in both satellite and cable and enjoys relationships with many of the leading digital TV Pay TV operators around the world. This quarter we launched the first OpenTV-enabled set-top box at Portugal Telecom, advanced HD/DVR platforms at NET in Brazil, DigiTurk in Turkey, TrueVisions UBC in Thailand, and also AUSTAR in Australia. We continue to make good progress with prospective customers in more mature Pay TV markets such as Japan and Europe and also in emerging markets such as India and Latin America.
We also continue to focus very closely on increasing the penetration of our middleware products and services in our existing customer base, which involves two key strategies: One, developing new and advanced features in technology in our core middleware platform, including the ability to support innovative and intuitive user interfaces aimed at enabling the consumer to more easily navigate the ever increasing array of content available. We really believe this strategy will help OpenTV show case and up-sell its core middleware platform moving forward. The other key strategy is to be first to market with new features and functionalities with both our Middleware and head-end based products, and also with a level of quality that is second to none in the industry. This element is critical for our customers who are facing increased competition and must look for value added, advanced digital services in order to retain and indeed grow their subscriber base. This requires us to be extremely efficient operationally and committed to the development of standard process that can be implemented across all business units. To that end our Program Management Office, for example, has begun efforts to launch the Prince2 Project Management standard for all customer-facing and R&D projects across the company. This is one key step to creating efficiencies by standardizing projects and business processes on a corporate-wide basis.
So moving to advanced advertising, our second line of business. In early February, we delivered a beta release of our EclipsePlus campaign management product to a set of key U.S. cable customers. Throughout the quarter, we have been closely engaged with them on beta testing of the product and I'm proud to say that the feedback and results have been extremely positive. EclipsePlus addresses key areas of functionality desired by our customers and provides significant performance improvement that will create operational efficiencies, which has been especially well received given the current economic environment. We continue to work closely with our U.S. cable customers and look forward to having them formally adopt the EclipsePlus product. To that end we are on target for general availability of EclipsePlus in mid-May and currently expect commercial deployment with key customers by mid-summer.
As we have previously stated, while the majority of our revenue from advertising is currently generated by our campaign management products, we continue to explore new initiatives and technology that builds on our experience in the areas of campaign management as well as interactive and addressable advertising. In order to drive this important line of business for OpenTV we announced last week the addition of Paul Woidke to lead our advanced advertising business. Paul joins us later this month from Comcast Spotlight and brings over 30 years of experience in the cable and advertising industry to his new position at OpenTV as Senior Vice President and General Manager of the advanced advertising business. Paul is very well respected in the industry and I'm delighted to have him on board. His mandate to OpenTV is to develop our advanced advertising strategy and products both for the U.S. and also internationally where we have a strong customer footprint of blue chip Pay TV operators.
Lastly on the business development side, we are pleased to announce that NBC Universal has licensed our OpenTV Participate product. NBC has selected our Participation TV platform for managing viewer transactions for interactive cross-platform events that include Internet, mobile, and interactive television. The platform will be used for a variety of shows and live events that are broadcast from their main channels especially NBC and Bravo. The deal highlights the continued interest of broadcasters to deliver programming inclusive of viewer participation and across multiple devices.
The Cable Show, formerly NCTA, is coming up on May 18-20. This event is a good opportunity for us to meet with several of our U.S. and international customers. We'll have an exhibition at this event where we will showcase our advanced advertising solutions and focus in on our EclipsePlus as well as our interactive advertising iAd Tools. In addition we will be showing some of the newest features of OpenTV Core Middleware platform such as support for pull and push Video-on-Demand, as well as external PVR hard drive support and media access via USB.
In closing, I believe we have renewed focus within the company and a solid foundation for growth and profitability at OpenTV. We're well placed both from a financial and market share perspective to capitalize on a digital TV market that continues to grow worldwide and requires innovative companies with global presence to meet the demand. The first quarter was a solid start to the year, and I believe we are well on track to meet both our strategic and our financial objectives for 2008.
With that I'm going to turn the call over to Shum, who's going to review our first quarter results in a little more detail. Shum?
Shum Mukherjee
Thank you, Ben, and good afternoon everyone. Billings in Q1 2008 were $37.4 million up 20% over Q1 2007, reflecting a $4.7 million or an 18% increase in middleware billings, and $1.5 million or 27% increase in billings in the advertising solutions segment. Billings in the middleware solutions segment were up in our EMEA and Asia-Pacific regions and flat in our Americas region. In our EMEA region, billings were up by $3 million, reflecting increased royalties from BSkyB and increased professional services business from Numericable and MCA. Middleware billings in the Asia-Pacific region were up $1.7 million or 28%, reflecting increased royalties from AUSTAR and increased professional service business from Reliance in India.
Billings in the advising solution segment were up $1.5 million, primarily reflecting increased billings to Time Warner and NBC. Revenues in Q1 2008 were $33.8 million, up 35% over Q1 2007, primarily driven by the successful closure of some of our pending contract negotiations with key customers. Q1 2008 middleware solution revenues were $30.1 million, up 38% from Q1 2007, primarily reflecting increased royalties from BSkyB and AUSTAR and increased professional services revenue from MCA, Numericable and Reliance. Revenues in the advertising solution segment were $3.7 million in Q1 2008, versus $3.3 million in Q1 2007 reflecting increased revenues from Time Warner and Comcast.
Deferred revenue at the end of Q1 2008 was $27.7 million compared to deferred revenue of $24.1 million at the end of 2007, primarily reflecting increased billings to DishTV, India and Time Warner that are not yet recognizable as revenues. Adjusted EBITDA before unusual items in Q1 2008 was $7.6 million compared to $400,000 in Q1 2007, primarily reflecting higher revenues. Contribution margin in the middleware solutions segment was $13.7 million or 45% of revenues which was more than double the contribution margin of $6.6 million in Q1 of 2007. Contribution margin in the advertising solutions segment was $700,000 compared to a loss of $600,000 in Q1 '07, reflecting higher revenues and the elimination of certain unprofitable product lines in this segment. Net income in Q1 2008 was $6.3 million compared to a loss of $3 million in Q1 2007.
Our balance sheet and financial position remain strong. Our cash portfolio as of March 31, 2008, was $96 million compared to $81.8 million on December 31, 2007. Accounts receivable were $31.3 million at March 31, 2008, compared to $16.6 million at December 31, 2007. During April 2008, we were successful in collecting a major portion of the receivables and our receivable balance at April 30, 2008, was down to approximately $20 million. Cash generated from operations during Q1 2008 was a loss of $600,000 compared to a gain of $1.8 million in Q1 2007, primarily due to the increase in receivables at the end of Q1 2008.
Now, moving to our guidance. We expect our financial results for the first half of 2008 to be stronger relative to the second half of the year, with Q2 '08 revenue expected to be in the neighborhood of 10% higher than the same period in 2007, which was $23 million. Our expectation for full-year billings continues to be in the range of $122 million to $132 million, but given current worldwide economic conditions and the potential for that to impact our customers' spending decisions, we are guiding towards the lower end of that range. We also reconfirm our guidance for full-year 2008 GAAP revenues to be in the range of $105 million to $115 million with a midpoint of $110 million. While we do not anticipate being profitable in each quarter due to the expected timing of revenue recognition, we do expect net income to be breakeven to slightly positive for the full year for the first time in the company's history. Moving forward, we intend to build on this key milestone.
Now, Ben, Mark and I will be pleased to answer your questions.
Question-and-Answer Session
Operator
(Operator instructions) Your first question comes from the line of Ali Mogharabi from B. Riley & Company. You may proceed.
Ali Mogharabi – B. Riley & Co.
All right. Thanks, guys. A very good quarter. Ben, can you first – I have got a couple questions here. Can you first give us an idea of about what role Paul Woidke would be playing out there at OpenTV? If you guys are actually focusing your advertising offerings a little bit more in the international market rather than the North American market? Thanks.
Ben Bennett
Yes. So, first of all, Paul as is quite a figurehead in the advanced advertising industry. So, I'm really very pleased to have Paul join the team. We've been working with Paul for a while now. His departure from Comcast is being handled very well. So there is no relationship issue and indeed Comcast as well is looking towards his next step. In terms of what Paul will be doing he will head up advanced advertising line of business. Now that is an international line of business. But two phases to that strategy – one, short-term opportunity certainly and our commitment is to the U.S. cable market and the national cable market in the U.S. Obviously Paul is pretty familiar with that market in particular. Not just around campaign management products which we are working closely with Time Warner and Comcast, but also exploring some of the interactive advertising technology that we have as well as obviously the golden noose – the golden goose, sorry, which would be addressable advertising side which is something the TV industry absolutely has to solve and we are committed to solving that problem.
On the international side, Paul is also to develop those solutions for some of our premium Pay TV operators worldwide. Now, there are some opportunities. That will be a market that will be developed over the next few years. But it's certainly the intention to develop both the U.S. and the international market. Paul has full authority. He will report to himself and he will be joining me and the rest of the team at the National Cable Show mid-May.
Ali Mogharabi – B. Riley & Co.
Wish you guys good luck. That does sound pretty positive. Regarding the NBC Universal, can you – Ben, can you give us a little bit more detail about the contract terms if possible by the way? How long of a contract is this and a little bit of an idea of how you guys will be getting paid on that?
Ben Bennett
Can't really comment on the contract terms, Ali. We've been working with NBC previously, but this is obviously quite an exciting deal for the company. And in fact, I think I have mentioned this before we received participation in the advanced advertising, lots of synergies between those two groups, and Paul Woidke will be also overseeing our participation TV business as well. I'm quite keen to develop relationships not just with Pay TV, but with the national broadcasters, and as you well know the product itself looks at multi-device interaction, so it's not just interactive TV, but mobile and on the web as well. So it is a start of a relationship. I can't really comment on the contract terms, but we are pretty excited about it.
Ali Mogharabi – B. Riley & Co.
Yes, actually just really quickly I remember watching the Kentucky Derby over the weekend and actually did use my cell phone to pick Big Brown as the winner. So –
Ben Bennett
Did you?
Ali Mogharabi – B. Riley & Co.
Yes, hopefully soon we will be able to use that remote control to do that.
Ben Bennett
Yes. My son watched that and I had to explain that poor horse who was put down.
Ali Mogharabi – B. Riley & Co.
Yes, the Philly. And then my last question on BSkyB, are you currently working on any additional advanced applications for those guys, or are we talking about revenues mainly coming in from the middleware side?
Ben Bennett
Revenues are predominantly Middleware, but we have a pretty close, in fact I'd say, a very close relationship, a good working relationship with BSkyB and indeed and in fact the entire News Corp. group. Can't say too much, but that relationship is strong and we hope to be working together with our future products including latest generation of our Core Middleware. But again, that's getting ahead of ourselves but the relationship is good, but to answer your question directly, it is mostly middleware related. I'm looking at Shum – I don't think – there is obviously maintenance and quite a bit of professional services but it's predominantly middleware royalties.
Ali Mogharabi – B. Riley & Co.
Got you. Thanks. Again, you and Shum, congratulations, and hopefully I'll see you guys at the NCTA.
Ben Bennett
Yes. Look forward to.
Shum Mukherjee
Thanks, Ali.
Operator
(Operator instructions) Your next question comes from the line of Todd Mitchell with Kaufman Bros. You may proceed.
Todd Mitchell – Kaufman Bros.
Gentlemen, great quarter. I say that all the time and I mean it this time. I have a question about a couple of things, particularly guidance. Okay. So you came in significantly ahead of expectations this quarter. You said next quarter is going to be ahead and then the rest of the year appears light. And you haven't changed your guidance. Can you address what the dynamic there is? It seems that you are pretty secure in your billings with – your core – News Corp. affiliates and emerging markets. You have mentioned that the U.S. is down. I'm assuming that the issue here is something to do with EchoStar, and can we assume that this relationship is just in flux or not resolved at this point? Is that the course – would that be – if there is some beta in guidance at the end of the year, would that be where it would lie?
Shum Mukherjee
Todd, let me answer your question and Ben can give some additional remarks. Guidance got nothing to do with EchoStar. All we are saying is that current economic conditions are relatively unknown in the world. We've seen, for instance, a number of customers talk about slowness in their business. And that's the reason we are basically saying that for billings we are guiding towards the lower end of the range. We still expect to be in the range, but we are guiding towards the lower end of the range. Revenues on the other hand, we are sticking to our original guidance as we are for net income for the full year.
Todd Mitchell – Kaufman Bros.
Okay. Yes. I guess it just seems to me that there was something pulled – I mean, pulled forward. Also on this line, why is the accounts receivables line? Why did that pop up so high?
Shum Mukherjee
Accounts receivable, a lot of the revenue in billings were down in the last month of the quarter. But as we said earlier on, during April, we had good collection effort. Our receivable balance at the end of April is $20 million and if you look at our historical trends that is completely in line with what we typically have as the receivables balance at the end of a quarter.
Todd Mitchell – Kaufman Bros.
Okay. And then on the – just looking at the – can we assume that the cost side is pretty stable at this point, too, in that business?
Shum Mukherjee
Yes. The cost side has been stable for a while and we continue to have good cost control and we expect to continue doing that going forward.
Todd Mitchell – Kaufman Bros.
Okay. And then my other question would be, in terms of the advertising side, I saw you made the announcement of this appointment, done some due diligence this guy seems to be pretty much at the center of what is going on with some of cable's efforts to put an interactive advertising and restructure in for themselves, the Canoe project. You have given some visibility on the recent quarter on the test that was conducted by Comcast, the "Wall Street Journal" highlighted they will be conducting another test. Can you tell us if this is part of the Canoe project?
Ben Bennett
Part of the Canoe project? I missed that question, Todd.
Todd Mitchell – Kaufman Bros.
I'm sorry. You have – you have hired this guy from Comcast to oversee your advertising business. We've gotten some visibility from the cable side on terms of what they hope to do with installing an interactive advertising platform, what that means i.e., this Canoe project. You had a "Wall Street Journal" article highlighting the targeted advertising trials with Comcast in Huntsville being upped and going into a larger trial in Baltimore. Can you tell us if it is part of this Canoe project?
Ben Bennett
No. Todd, actually, I can't comment on Canoe. Honestly, remember, Paul is also still – he's still with Comcast as of today and you have to be a little bit careful. He joins us mid-May. He will be with us at the NCTA. Obviously Paul (inaudible) will be to – one of the key issues as you all know for the U.S. cable is the ability to target and tune into households and that's the national broadcasters – Paul, in fact was one of the key participants, are losing a lot of money to new media. He's actually quantified it at recent conference. So one of the things that Paul will be looking at is not just our obviously relationship with cable and extending our campaign management, but also helping us to develop some of those advanced features, some of which were addressable, and the addressable side could be both at the set-top side and also integrated with our campaign management. I think Paul is just ideally suited. And the motivation when we started talking the motivation for Paul to join the company and lead pretty important initiative for us, is also about creating something. He has been at the center. He has been with U.S. cable. And it is also I'd hope good for U.S. cable and good for our customers because we will give the tools to someone who really understands where the problems are. And we need to solve this. We absolutely – and Paul understands this. He wants to – the reason he has joined the company is to create something, create product that addresses this problem that he has been talking about for a number of years.
Todd Mitchell – Kaufman Bros.
Okay. And then I'm going to ask sort of the perennial question regarding your cash position. It seems like you cleaned up your book of business and the P&L looks stronger. You have a lot of cash. Any thoughts on what you are going to do with that, or any change?
Ben Bennett
No, I can't really comment on this call, Todd. In terms of where the company has been and where I want the company to go, we have got – we are cash flow positive. Okay. This one quarter was I think a blip to be honest. But we're pretty confident that we are cash flow positive moving forward. In this economic environment it is good to have this amount of cash. We made and capitalized on the – in some of the downturn. There are a lot of companies out there. But nothing as yet specific on the horizon. So, I think I can't really comment on anything other than that at the moment.
Todd Mitchell – Kaufman Bros.
Okay. Well, listen, great quarter. Thank you very much.
Ben Bennett
Thanks, Todd. Will you be at NCTA?
Todd Mitchell – Kaufman Bros.
Yes, I am. I'll be there.
Ben Bennett
Okay. We'll see you there.
Operator
And you now have a follow-up from the line of Ali Mogharabi. Go ahead.
Ali Mogharabi – B. Riley & Co.
I'm sorry, guys. Actually to follow-up on one of the last questions. Ben, I don't think you made a comment regarding OpenTV's current relationship with EchoStar.
Ben Bennett
The relationship is good. Obviously EchoStar is going through some transformations, and I don't think so I can really comment on those, but we continue to work with them both on the middleware and the application side, and I don't see anything specific. We'd like to help them on their international endeavors on the set-top side. I have mentioned that before, but, again, I can't really comment much more than that, Ali. Relationship is pretty solid and we continue to work with them.
Ali Mogharabi – B. Riley & Co.
Thanks.
Operator
And at this time, we've no further questions; I'd like to turn it back to management for any closing remarks.
Ben Bennett
Thank you, Jeremy. So with that, I'd like to close the call. Thank you for everyone's participation in this Q1 earnings call, and I actually look forward to speaking with you all again in the summer. Thanks a lot. Thanks a lot, operator.
Operator
Thank you. Ladies and gentlemen, we thank you for your participation in today's conference. This does conclude the presentation. And you may now disconnect. Have yourselves a great day.
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