OpenTV Corp. (OPTV-OLD) Q2 2008 Earnings Call August 7, 2008 5:00 PM ET
Mark Beariault – General Counsel
Ben Bennett – Chief Executive Officer
Shum Mukherjee – Chief Financial Officer
Robert Reynolds – [inaudible] Capital
Ali Mogharabi - B. Riley & Company
Welcome to the second quarter OpenTV Corp. annual conference call. (Operator Instructions) I will now turn the call over to Mark Beariault, General Counsel.
Welcome to OpenTV’s second quarter 2008 financial results call. I would like to remind you that during this call members of Open TV’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 may cause our actual results to differ materially from this described in these forward-looking statements. For example, statements regarding forecasted growth of the markets for our products are believed to expand our product offerings and distributions, our ability to maintain our momentum and 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 SEC, and any updates to those risk factors contained in our quarterly reports on Form 10-Q and any other documents that we file from time to time with the SEC. Those documents and reports can also be viewed on the Investor Relations page of our website. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, feature events or otherwise.
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 have 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 on our website. With that, I’ll turn to call over to Ben Bennett, Chief Executive Officer of OpenTV.
Joining me today is Shum Mukherjee, Chief Financial Officer.
OpenTV reported solid second quarter results earlier today, including revenue of nearly $27 million, and slightly positive net income. We continue to general positive cash flow, a key strength in this economic environment. The company boasts a sound balance sheet. Shum’s going to provide a detailed review of our financial performance during our second quarter and the company’s full-year 2008 outlook. But I want to take this opportunity to highlight that our overall performance during the first half of 2008 means that we are on track to meet our projected outlook for the full year, or break even to slightly positive net income.
I’ve mentioned on previous calls this is a fundamental objective of this management team, and one to which we are fully committed to achieving and sustaining moving forward. We consider the 2008 net income goal an important first step in the long-term profitable growth of the company.
Let me now review a few metrics. At the end of the second quarter, over 111 million OpenTV-enabled digital devices have been shipped worldwide. Our worldwide market share is approximately 58%, and we continue to make inroads into the emerging markets as well as developing new businesses for our existing customer base. With a global footprint of more than 55 customers in 36 countries, OpenTV business benefits from a strong mix of customers from satellite, cable, and terrestrial markets.
As an example of our momentum, I’m extremely pleased to announce that we have signed a new multi-year deal with SKY Perfect Communications, Japan’s largest pay TV platform operator. With 4.2 million subscribers in Japan, SKY Perfect is the largest satellite broadcasting platform operator in Asia, and indeed one of the largest pay TV operators in the world. The deal demonstrate our ability to win major new operators worldwide, and particularly in the highly competitive Asia Pacific region. However, I’m not at this time in a position to publicly comment on the specifics of this deal. I can say that we are very, very excited to support the launch of SKY Perfect’s next generation set top box platform. It will be an advanced solution built on OpenTV core middleware, using our latest DVR technology. On launch, I expect this will represent one of the most advanced HD solutions yet deployed by OpenTV. This partnership marks our entry into the Japanese market, with one of the top pay TV operators in the world that is measure by total subscribers.
As with all new middleware deals, investment comes before return, and we have already begun to ramp up our development efforts for this key customer. This does include expanding our operations and expanding into new office space in Tokyo in the fourth quarter of this year to accommodate local integration and sales support teams. To be clear though, these investments will not change our guidance for 2008 net income, which Shum will discuss in a moment.
Highlights of other customer activity during the quarter included commercial launch of Foxtel, Australia’s leading pay TV operator of the Foxtel IQ2 platform. This is an advanced quad tuner high definition DVR-enabled set top box running on OpenTV’s core 2, our 5th generation middleware. In Latin America, we launched a core 2 HD DVR platform with Net Brazil. In Europe, we launched in conjunction with Nagravision OpenTV enabled set top boxes with TV Cabo and Portugal Telecom, establishing a solid presence for OpenTV in this country. We also extended our relationship with Hot, Israel’s largest cable TV provider by launching their core 2 HD platform in time for the European soccer tournament.
Finally, in South Africa, we’ve once again extended our relationship with a long-time customer by completing the commercial launch of a core 2 HD DVR platform with NCA, in time for the start of the summer Olympics tomorrow. These partnerships demonstrate that we are executing on our middleware strategy, aggressively pursuing new business, like SKY Perfect, but also expanding our business with key existing customers, both middleware and headend related products. We are strengthening our operations in Beijing, China, by expanding to a new office facility that will primarily focus on engineering and QA. In addition, in India where emerging digital pay TV operators and MSOs are experiencing record subscriber growth, we’ve appointed an experienced general manager who will be based in Dubai. We will also be setting up local engineering support officers. These initiates will help OpenTV facilitate business development in this region as well as optimize our existing relationships with customers such as Reliance, Sun TV and the Essel Group.
With these customers, OpenTV is the market leader in India for middleware and advanced interactive services. India offers a great growth potential for OpenTV. According to media partners Asia, India’s net DTH pay TV subscribers are expected to grow from 3.3 million in 2007, 7.1 million in 2008, and almost 12 million in 2009.
Further onto our second strategic line of business, advanced advertising, last quarter we spoke about the beta release of our Eclipse Plus campaign management product to a set of key US cable customers. The results of the beta program were extremely positive and we have officially released this product into general availability on May 15th of this year. Customer feedback has reinforced that this new release addresses key areas of functionality and provides significant workflow and performance improvements, features that are really critical to our customers in the current advertising environment.
Today, I’m pleased to announce that Comcast Spotlight, the advertising sales division of Comcast Cable, and OpenTV have entered into a multi year agreement for the licensing of our Eclipse Plus product. Comcast has already launched Eclipse Plus in Baltimore, Philadelphia, and Seattle, and we are working closely with them on the roll out of the Eclipse Plus in a number of other markets. In addition to Comcast, we are also in discussions with other US cable operators regarding our Eclipse Plus product and we look to be able to announce additional deals in the future.
In summary, from a financial perspective, we have a strong balance sheet including over $100 million in cash and no debt. We’re focused on building our core businesses as demonstrated by these recent deals with SKY Perfect and Comcast. From a market share perspective, I believe we are well positioned to capitalize on a global digital TV market that is set to grow from a 175 million digital TV households today to over 335 million by 2011. While the current economic environment is certainly a challenging factor, I believe OpenTV is well on track to meeting both our strategic and financial objectives for 2008. We consider 2008 an important year for the company re-establishing our focus on key businesses and execution principles. I do also want to emphasize to our shareholders and customers that we are fully committed to the long-term development of our key technology and markets, particularly with the advanced cable DTH and advanced advertising.
So with that, I’m going to turn the call over to Shum, who will review in detail our second quarter results and four year outlook.
Billings in Q2 2008 were $30.1 million, up 3% from Q2 2007, reflecting a 4.4 million, or 20% increase in middleware billings, and a $1.3 million, or 53% increase in billings in the advertising segment. Billings in the middleware segment were up in all three of our regions. In the Americas region, billings were up 26%, or $900,000, reflecting increased billings for royalties related to Net in Brazil, and Star Choice in Canada, partially offset by
reduced billings to EchoStar. Billings in our EMEA region were up $1.3 million, or 13%, reflecting increased billings for royalties related to BSkyB and MCA. Middleware billings in the Asia Pacific region were up $2.8 million, or 37%, primarily reflecting increased billings for royalties related to Reliance in India.
Moving to the advertising solutions segment, billings were up $1.3 million, primarily reflecting increased billings due to Comcast for our advertising campaign management systems. Year-to-date total billings were $67.5 million, up 22% from the same period in 2007, with the middleware segment up 19% and the advertising segment up 35% year-to-date compared to 2007. Revenues in Q2 2008 were $.8 million, up 17% over Q2 2007. Revenues in the middleware segment were $23.5 million, up 16% from Q2 2007, primarily reflecting increased business from Net in Brazil, BSkyB, MCA and Reliance, partially offset by reductions in revenues related to EchoStar and J Com. Revenues in the advertising segment were $3.3 million, up 18% from Q2 2007; primarily reflecting increased revenues from Time Warner from our advertising campaign management system.
Year-to-date revenues were $16.6 million, up 26% from the same period in 2007, with middleware revenues up 28%, and advertising revenues up 15%. Deferred revenue at the end Q2 2008 was $31 million, compared to deferred revenue of $24.1 million at the end of 2007, primarily reflecting increased billings to Dish TV India, and Time Warner that are not yet recognizable as revenues.
Adjusted EBITDA before unusual items in Q2 2008 was $2.5 million, compared to a loss of $1 million in Q2 2007, primarily reflecting higher revenues. Contribution margins in the middleware segment was $7.9 million, up $3.5 million from Q2 2007 or a revenue increase of $3.3 million. Contribution margin in the advertising solution segment was $200,000, compared to a loss of $300,000 in Q1 2007. Adjusted EBITDA for the year to date period was $10.1 million, compared to a loss of $600,000 in the same period of 2007, reflecting an increase of EBITDA of $10.5 million in the middleware segment on a revenue increase of $11.6 million and an increased EBITDA of $1.8 million in the advertising segment.
Net income in Q2 2008 was $21,000, compared to a loss of $4.8 million in continuing operations in Q2 2007. Net income in the first half of 2008 was $6.3 million, compared to a loss of $7.8 million from continuing operations in the first half of 2007. Our balance sheet and financial position remains strong. Our cash portfolio as of June 30, 2008 was $100.4 million, compared to $81.8 million on December 31, 2007. Cash generated from operations was $5.8 million for Q2 2008 and $5.1 million for the first six months of 2008, compared to cash generated from operations of $2.8 million in Q2 2007 and $4.6 million in the first six months of 2007.
Now, moving to guidance. We continue to expect that our financial results for the first half of 2008 will be stronger relative to the second half of the year. Q3 2008 revenue expected to be in the neighborhood of 10% higher than in the same period of 2007. Our expectations for full year billings continue 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 are also reconfirming our guidance for full year 2008 GAAP revenues to be in the range of $105million to $115 million, with a mid-point of $110 million. While we do not anticipate being profitable in each quarter due to the expected timing of revenue recognition, we do expect that net income will be slightly positive for full year 2008. And now, Ben, Mark, and I will be pleased to answer your questions.
Question and Answer Session
(Operator Instructions) Today’s first question comes from Robert Reynolds of [inaudible] Capital. Please proceed.
Robert Reynolds - [inaudible] Capital
Hi, with regard to the cash on your balance sheet, I can understand the appeal of the options that gives you strategically, but beyond a certain point it becomes wasteful and I think even stupid to have that much tied up in such a low-return asset. That’s been sitting there for quite a while, it just keeps piling up. I assume that you’ve given some thought as to how you’re going to deploy it, and I’m just wondering if you can give us some idea of how and when you plan to resolve that issue. I think it certainly doesn’t do anybody any good to let it sit there and keep growing, and I think we’re beyond the point where some decisions need to be made. So if you can comment on that, I’d appreciate it.
Though I can’t give any details on timing on making use on that cash, all I can tell you at this particular point in time is that there are a number of opportunities on the table, but I understand your concern, but it’s not a bad position to be in. I understand you may want to use that cash in other ways, but I literally cannot just comment on any more detail on how we are going to use that cash. We are looking very closely and strategically at both of our lines of business on what we need to do, and in the next few quarters there may be perhaps a little bit more detailed information.
The next question comes from Ali Mogharabi at B. Riley & Company.
Ali Mogharabi - B. Riley & Company
Why reduced billings on EchoStar, and will they continue to work with you guys in the future?
I don’t think EchoStar, obviously there were some press releases recently, their shipments slightly down, I think there’s many customers struggling from the economic conditions. I can’t really forecast how that’s going to move forward in terms of shipments, what I can say is we’re closely working with EchoStar on a day to day basis, both in the middleware segment, specifically around the applications. But also we have a number of discussions ongoing with them around some advertising opportunities. I mean, shouldn’t they offer some other detail on billings for EchoStar? He’s shaking his head, so.
No, things have been tough for a while as you know. If you go back the last three of four quarters they have been trailing downwards.
Ali Mogharabi - B. Riley & Company
Gotcha, gotcha. And then Eclipse Plus, congrats on the announcement with Comcast. Should we expect similar announcements with other cable operators, not only in the United States, but also internationally? And if so, can you name us a couple?
You give me hard questions, don’t you? I think we’ve made great progress actually, in the Eclipse product line, as you know. We’ve spent a lot of time and effort re-establishing good relations with US Cable, I think the addition of [core] has been a real bonus, I think the team’s pretty excited. I think the deal with Comcast is proof that relationship’s back on track. We are, as we said in the script discussing opportunities for the host of US Cable companies around Eclipse Plus. That’s made very much traffic and billing, and we’re also talking to them in depth about next generation and the advanced features, which puts the product more into a campaign management arena. And, you know, those discussions are pretty much ongoing, and I think step one is getting Eclipse Plus which has received good reviews, I don’t want to get too carried away, I won’t say great but the momentum of all US Cable was pretty good. It helps them on workflow, it helps them with cost efficiency, and I’m pretty confident in the next couple of quarters you’ll be seeing some interesting announcements around that Eclipse Plus with other cable operators.
Ali Mogharabi - B. Riley & Company
Gotcha, that makes sense, actually. My last one here, about the new contract with Japan, with SKY Perfect?
Ali Mogharabi - B. Riley & Company
Revenues, I just wanted to know, I don’t know if you can tell me this yet but revenues for that one, is that the regular one-time per set top box, or could you come up with a revenue similar to some of your customers in India? Basically monthly per subscriber or per set top box?
The reason I put the note in the script, I can’t really comment much more. We haven’t, as you know, made a formal press release. What we’ve done is we had what we had in the script agreed with the customer, SKY Perfect. This is a long-term commitment on both parties. It’s fantastic news for the company, but very large market. But I can’t really comment on specifics about the deal, not at this particular point in time. There will be a press release later, but timing in terms of launch etc. I’m not authorized to talk about yet. What I can say is that we’re pretty excited, it’s a big market, it’s very large, the second largest digital TV market from an advertising, it’s a 19 billion, 29% of the worldwide market. So, you know, with the expanding of our operations in Japan, it just presents a great opportunity for us, and it really helps drive our long-term road map, some of the stuff we’re going to be doing with them is pretty innovative. I’ll be able to give you more of the specifics once we have a formal press release and a green light from the customer.
Ali Mogharabi - B. Riley & Company
We are talking about middleware on this one initially, correct?
At this time, there are no further questions.
I want to thank everyone for their participation, and we look forward to speaking with you on the next conference call. Thank you very much.