TiVo Inc. (NASDAQ:TIVO) Q3 2018 Earnings Conference Call November 7, 2018 5:00 PM ET
Nicole Noutsios - Investor Relations
Raghu Rau - Interim Chief Executive Officer
Peter Halt - Chief Financial Officer
Eric Wold - B. Riley
Ugam Kamat - JPMorgan
Hamed Khorsand - BWS Financial
Good afternoon. My name is Jessie and I will be your conference operator today. At this time, I would like to welcome everyone to TiVo Corporation 2018 Third Quarter Results Conference Call. [Operator Instructions] I would now like to turn the call over to Nicole Noutsios, TiVo Investor Relations.
I am Nicole Noutsios, Investor Relations at TiVo. With me today are Raghu Rau, Interim CEO and Peter Halt, CFO. We just distributed a press release and filed an 8-K detailing our third quarter 2018 financial results. In addition, we posted a downloadable model on our IR site showing historical financial results and GAAP to non-GAAP reconciliations. After this call, you will be able to access a recording of this call on our website at tivo.com as well as a transcript of the company’s prepared remarks.
Our discussion includes forward-looking statements about TiVo’s future business, licensing, product, estimated annual run-rate savings and growth strategies. We caution you not to put undue reliance on these forward-looking statements as they involve risks and uncertainties that can cause actual results to vary materially from these forward-looking statements as described in our risk factors and our reports filed with the SEC. Any forward-looking statements made on this call reflect our analysis as of today and we have no plans or duty to update them, except as required by law.
With that, I will turn the call over to our Interim CEO, Raghu Rau. Raghu?
Thank you, Nicole and thank you for joining us for our third quarter earnings conference call. We had a good quarter and I am pleased to share that TiVo remains ahead of our internal plan for 2018 and we are focused on driving sequential revenue growth in Q4.
The company continues to explore all possible strategic alternatives to maximize value for our shareholders and I would like to update you on that front. As mentioned on our prior earnings calls, we believe there is strategic value in each of our product and IP businesses. We remain in various active discussions, but due to the unique nature of our business, the process is taking longer than we had hoped. It is our intention to complete the strategic review process by our fourth quarter and yearend 2018 earnings call. Significantly, the strategic review process is informing our view of TiVo’s growth strategy. I am very excited about the possibilities on this front and would like to discuss these opportunities.
In our products area, we have a number of initiatives we are excited about and believe are key to driving growth. Some are new and others are already in development and have begun showing traction in the market. While we will provide more information in the future, we began investing in a new opportunity that combines our expertise in Pay TV and OTT to build unique entertainment discovery platform for the Internet age.
With the proliferation of content from multiple sources around the world that is delivered through broadcast, TV, OTT, on-demand and internet streaming, TiVo offers a powerful platform to engage audiences through a single, unified content discovery experience. The platform will enable end-users to experience content from leading digital brands integrated with live, recorded and OTT streaming titles. We are re-imagining the guide as one integrated content network that allows you to access all of the content you want to watch seamlessly. We believe this product has the potential to change how you watch TV again.
In addition, this unified discovery experience and content network will enable multiple high CPM targeted advertising opportunities for TiVo. These include sponsored discovery, content merchandising, display promotions, in-stream advertising, DVR ad replacement et cetera. We look forward to sharing with you our progress on this exciting initiative in the upcoming quarters. On the IP front we continue to believe that our IP licensing business and patent portfolios are among the best in the industry. The key growth opportunities we are focused on continue to be international markets, content providers and new media. While we already have licensees in Canada, Asia and Europe, there is still a meaningful opportunity in these regions for additional growth. Additionally, we made progress with content providers which I will discuss later in the call.
Next, I would like to provide an update on the cost management program we have underway. As we have said in the past, we remain focused on looking at all areas where we can optimize our business to drive improved cost efficiencies and execution. We previously announced that we have taken actions that will result in $10 million in additional current year cost improvements and we are on track to deliver total annualized savings of $25 million by the end of 2018. I am pleased to share that these actions have been completed and those results will be achieved by year’s end. As previously discussed, these are reductions to our run-rate business expenses.
Now, turning to our two businesses. On the products side, we are exceedingly pleased with the progress we are making in extending our user experience technology leadership. This past quarter I was able to personally experience the enthusiasm for TiVo Experience 4 at the IBC conference in Amsterdam, where I met with both existing and potential customers. I am proud to share that they are extremely excited about this solution and how we are extending it to provide an IPTV offering. Additionally, in September, we launched the TiVo BOLT OTA, a premium, 4K ultra-high definition capable set-top box designed to work with a high-definition antenna. This all-in-one home entertainment product seamlessly combines the features of TiVo’s powerful DVR with the most popular online streaming services and encouragingly we are getting great customer feedback.
I am not surprised that the launch of TiVo BOLT OTA also generated a number of very positive product reviews; emphasizing the superior value delivered to customers and the new features included. Forbes Magazine stated, while there are other OTA solutions out there, I think that TiVo’s software package is the best in the game. The article went on to say the BOLT OTA can be a lifesaver. It’s the best way to watch whatever it is you want to watch. In addition, the TiVo BOLT OTA is also a great companion to our TiVo Experience 4 product and allows us to offer a full range of solutions to consumers regardless of whether they are cable subscribers or not.
We also continued to make progress internationally with several new customers this quarter. In Europe, one of the largest suppliers of integrated multimedia services in Eastern Europe selected TiVo’s set-top box software solutions for use as part of its ultra HD service. Additionally, a leading provider of integrated communications services in Latin America initiated the process of upgrading customers with the new Passport guide in 7 countries. The continued expansion of our product and solutions worldwide speaks volumes to TiVo’s top of the line technology offerings. In terms of our software and service offerings for Pay TV service providers, we continue to see success with our best-in-class voice solutions for natural language understanding of entertainment search queries. As I saw at IBC, there is tremendous enthusiasm about our voice offering, including the larger operators who have their own user experiences. I anticipate announcing some additional customers for this product in the next couple of quarters.
Now, turning to voice usage, as a reminder, in the past two quarters we have provided some statistics which I would now like to update for you. First, unique voice users grew 70% from 1.4 million in Q2 to 2.4 million users in Q3. Additionally, our quarterly queries grew 47%, growing from 84.1 million queries in Q2 to 123.3 million in Q3. I am pleased that once again this quarter was marked by significant user growth along with substantial increase in usage. I believe this is a testament to the potential of this product, which should continue to see rapid growth in conjunction with TiVo’s expansion in the marketplace.
On the intellectual property licensing front, I would like to provide an update on our Comcast litigation. I believe a simple condensed view of what is happening in this multi-forum dispute over our important patent technologies would be helpful. As you know, nearly every major media and entertainment company licenses our intellectual property for its use and the result has been a massive improvement over the last few years in the innovative product features they deliver to their consumers. For example, when away from home, users can simply set their DVR to record a show from anywhere in the world and have user-friendly guides with which they can find and record any show offered by their cable provider. Last year, the International Trade Commission, or ITC ruled that Comcast infringed two of Rovi’s remote record patents. Comcast chose to no longer make these popular remote recording capabilities available to their X1 subscribers rather than negotiate a market rate license agreement.
As a result, we are back in the ITC for a second Comcast trial on three additional patents covering different popular features innovated by Rovi. A similar adverse judgment could leave Comcast with the choice of once again removing features its customers consider essential to their viewing experience or entering into a commercially reasonable license with us. In addition, we have a number of district court cases filed in New York, Massachusetts and California, including one related to the ‘034 patent which we believe will become active next year. These district court cases are where Comcast would incur monetary damages if we prevail.
While the ITC and district court cases are ongoing, Comcast has been more aggressively pursuing patent challenges in the form of inter-partes review, or IPRs, with the Patent Trial & Appeal Board, or PTAB than any previous company. The IPR process, since its creation, has been unfriendly to patent holders. While we have had mixed results at the PTAB thus far and TiVo intends to appeal many of the adverse determinations, we are encouraged for the future by recent comments from the current U.S. Patent and Trademark Office Chief regarding his intention to change the way PTAB works to make it more equitable for inventors. Importantly, these PTAB challenges and results have not changed the prior ruling that required Comcast to remove the remote recording capabilities. Overall, while the particulars of the various legal fights might be complicated, our message is simple. TiVo is fully committed to protecting its intellectual property from unauthorized use and we expect Comcast will ultimately pay a license for our innovations, just as its Pay TV peer companies do and Comcast did in the past.
Now, in terms of our day-to-day licensing business, we continue to focus on providing relevant IP to content providers as one of our areas for future growth. On that front, we made meaningful progress this quarter as 21st Century Fox signed a multi-year patent license agreement. Additionally, a large American broadcaster expanded its multi-year patent license agreement to include an acquired network. We now have approximately 45% of the top 250 U.S. channels under license. In summary, I am excited about the prospects for our business and the strategic initiatives that we are undertaking to drive long-term profitable growth.
With that, I would like to turn the call over to Peter who will provide a financial overview. Peter?
Thank you, Raghu. We had a solid quarter and in Q3 stayed ahead of our internal plan for both the quarter and the year. As Raghu mentioned, we continue to focus on both investing in initiatives that will support long-term profitable growth for TiVo and driving efficiencies in our cost structure.
Before I get into a detailed discussion of our results, I want to remind you that our results in 2018 are being reported in accordance with ASC 606. As discussed on our last two calls, we adopted the amended revenue and cost recognition guidance on January 1, 2018 using the modified retrospective transition approach. As a result, our results for 2017 are reported under the prior standard and our results for 2018 are reported under the new standard. While there is no change in either the nature of our business operations or our cash flows, revenue recognition in 2018 is considerably different than in 2017. On a consolidated basis, third quarter revenues were $164.7 million. Our core business generated $156.4 million in revenue in the quarter. Core revenue was $2.9 million less under ASC 606 in Q3 than it would have been under the prior revenue recognition standard.
In Q3, our non-core revenues included $2.8 million of revenue from legacy TiVo Time Warp IP deals, hardware sales of $3.9 million and our legacy analog products, classified as other product, of $1.6 million. This is the last quarter we will recognize any revenues from the Legacy TiVo Time Warp deals. The last of these deals expired in July. As previously discussed, we are also transitioning away from selling hardware and analog products.
In terms of total GAAP cost and results for Q3, GAAP total operating cost of $172.4 million in Q3 were down $27.1 million or 13.5% from last year. Q3 GAAP operating costs include $42.6 million of depreciation and amortization, $9.5 million in stock-based compensation and $2.7 million of other cost primarily to our ongoing restructuring actions that are excluded from our calculation of adjusted EBITDA. GAAP operating losses in Q3 was $7.7 million and our GAAP net loss before taxes from continuing operations was $18.2 million.
In terms of our non-GAAP results, non-GAAP total COGS and operating expenses were $117.6 million, down $13.8 million or 11% year-over-year. This quarter’s non-GAAP total COGS and operating expenses, like last quarter’s, benefited from reduced hardware sales due to our planned transition away from the hardware business, along with synergies from our cost savings initiatives.
Adjusted EBITDA in Q3 was $47.1 million and non-GAAP pre-tax income was $32.9 million, down $19.4 million and $21.2 million respectively due to the year-on-year decrease in revenues partially offset by lower hardware costs and the benefits from our cost savings initiatives. Estimated cash taxes for the quarter were approximately $3.7 million. For the quarter, GAAP diluted weighted average shares outstanding were 123.5 million and non-GAAP diluted weighted average shares outstanding were 124.1 million. For those interested in calculating our non-GAAP EPS, take our non-GAAP pre-tax income, subtract our cash taxes and divide by non-GAAP weighted average shares outstanding.
Turning to segment results, in Q3, core product revenues were $89.1 million, down $4.0 million year-on-year. The decline was primarily due to the adoption of ASC 606, which resulted in a $4.5 million decrease in revenue primarily from two international MSO software customers compared to what would have been recognized under the prior revenue guidance. As a reminder, under ASC 606, while we still will collect the same amount of cash, we anticipate reduced recognition of revenues when compared to the prior standard for the remainder of 2018. Product adjusted operating expenses were $79.3 million in Q3, down $12 million from last year, a $5.7 million decrease in hardware COGS plus our ongoing operational efficiencies drove this decrease.
Moving on to the IP licensing business. IP licensing revenues of $70.1 million in Q3 included just $2.8 million of Time Warp revenues. As a reminder, the last of the Time Warp agreements expired in July. Core IP licensing revenues of $67.3 million were down $3.3 million year-on-year. The largest driver of this decrease was a $3.3 million decrease in revenue from out-of-license settlements done last year. IP licensing revenue was also negatively impacted by a CE manufacturer being out-of-license. We continue to believe this customer will execute a new license. Growth in revenue from new media and international Pay TV providers partially offset the CE decline.
IP licensing adjusted operating expenses of $23.5 million in Q3 were down $0.8 million from last year. This is attributable to benefits from cost savings initiatives partially offset by $1.1 million increase in patent litigation cost. Additionally, as we mentioned on previous earnings calls, we are experiencing a year-on-year increase in how much we spend on IP litigation as a result of our investment in the ongoing Comcast litigation. Also keep in mind that, as Raghu mentioned earlier, we are litigating in the ITC in Q4, so we expect an increase in litigation costs sequentially in Q4 from Q3.
We have a very strong balance sheet with cash and investments at the end of the quarter of $382 million. We also have $1 billion in federal NOLs and a remaining stock repurchase program authorization of $150 million. Additionally, our Board once again declared a dividend of $0.18 per share, which will be paid on December 20 to shareholders of record on December 6.
As our in-depth review of our business, cost structure and strategic options to maximize shareholder value continues, we are still not providing financial estimates. That said, as Raghu mentioned earlier for Q4, we are focusing on driving sequential revenue growth quarter-on-quarter. Additionally, as I previously mentioned we will likely also have a sequential increase in IP litigation spend given the timing of the Comcast ITC trial.
With that, I will now turn the call over to the operator to open the line for questions. Operator?
Thank you. [Operator Instructions] Your first question comes from Eric Wold with B. Riley. Your line is open.
Thank you and good afternoon. A couple of questions I guess around the litigation process of the Comcast, I guess one looking at what’s come through the IPR process, there’s been a couple of patents where a number of the patent claims were upheld and a number of the patent – the claims were invalidated. Can you maybe talk about the strategic importance of the claims that were upheld given that they were not initially asserted against Comcast in the original litigation? And then on the changes to the PTAB around patent review, maybe a little more detail as to how you feel that impacts TiVo going forward? Is there an opportunity to kind of look back at the ones they’ve reviewed so far in a repeal process or is this really only relevant to any future challenges from Comcast, the parties on claims sort of not been or patents have not been challenged to-date?
Sure. Thank you very much, Eric. Firstly, I know there has been a lot of discussion around the IPR, so I really want to put this a bit in perspective. Firstly, our dispute with Comcast is not related only to the PTAB, but it’s a multi-forum one, which includes the ITC, the district courts in New York, Massachusetts, and California, the PTAB and the Federal Circuit Court for Appeals. And as we know and have mentioned earlier, we did the first ITC trial, Comcast was found to have infringed on two of our patents and was forced to defeature the X1 product, so consumers no longer have the ability to remote, record. While we admittedly have had mixed results at the PTAB, this is a forum which has been well-known to be patent holder unfriendly. And you referenced some of the changes coming at the PTAB, that’s absolutely true. Some of these changes include some new standard operating procedures and new claim interpretation rules that have been promulgated by Director Iancu [ph] USPTO. This will – we believe will really help level the playing field for the patent holders and we welcome some of those changes.
Notwithstanding that we have already appealed three adverse determinations and nothing changes on the ground despite the mixed results that we’ve had with the PTAB. Comcast consumers will continue to be deprived of the feature sets that their competitors have licensed from TiVo. So that’s I think give – that gives you a holistic view of where we are with the PTAB. And we do have ITC 2, the second trial, which has just been completed, and we have three patents issue there as well, and if we prevail on those then again Comcast will have to further defeature those products, their X1 product or will have to come and take a license at market rates.
And do you mind addressing the – about the claims in two of the patents, obviously, the claims that were upheld were not originally asserted, maybe just to understand why that wasn’t the case and if they – the kind of the importance of that? And then secondly and lastly, a question there for Peter, if I use the calculations from the non-GAAP pre-tax and the various data you gave out in the press release, they kind of come to $0.24 in non-GAAP EPS for the quarter. if I can get them confirmed as well?
That would be correct, Eric. In regards to the first question, I mean, we don’t comment on litigation strategies. We’re not going to say anything specific about any of the individual patents. Just do note that the approach Comcast took was basically to file against every claim registered under the patent.
But to your question, Eric, there were three patents, which the PTAB did not even institute any IPRs or any review. One of the patents, the 034 patent is being litigated in the District Court of New York and that case we expect will become active early next year and we expect it to be concluded hopefully sometime by the end of next year. Now if we win on – at the District Court level, that’s when monetary damages start piling up. And if the court determines that there has been willful infringement of our patents then we get significantly higher damages. And these damages depending on the length of time Comcast takes to get a license could run into the tens of millions or even the hundreds of millions.
Perfect. Thank you, guys.
Your next question comes from Sterling Auty with JPMorgan. Your line is open.
Hey, guys. This is actually Ugam Kamat on for Sterling. So in the press release you mentioned that the discussions around the strategic review process is taking longer than you hoped. Is this delayed because of the uniqueness of TiVo’s business or are you seeing that the interested parties in the business is driving that particular delay or is the delay from your side?
No. As I mentioned earlier on the call, we remain in various active discussions, but the process is taking longer than we’d hoped because of the uniqueness and the complexity of our businesses.
Okay. And –
And I also mentioned that – I also mentioned just to reiterate that it is our intention to complete this review process by our fourth quarter and year-end 2018 earnings call.
Alright. And you were involved in a litigation with Hulu last year. There was a court order like asking you to negotiate the contract. But any update on that stance on your negotiations with Hulu at the moment?
Well, we won’t just talk about any of the specifics around negotiations with any of our customers, but last year Hulu did file an action with us and it was stayed because both parties entered into conversation and it currently has stayed.
Okay. And if I could squeeze one last one in. Within the OTT space, we are seeing a high amount of content aggregation where there are players coming in, who are trying to aggregate the content across say Netflix, Hulu, Amazon Prime. Then if that happens, how does that change the economic model and the royalties that you get from it? Is there a change from the normal standalone versus users buying OTT content aggregators?
That’s a really good question and that relates to what we’re trying to do with this new opportunity, I mentioned we were investing in, where we’re going to create the guide for the Internet age and create content network precisely to be able to enable digital content and linear content to be commingled and integrated and create a seamless discovery experience. So the content aggregators as well as digital brands are really interested in getting the content exposed to mainstream TV viewers and enabling the easy access without having to be discovered through a separate application or a separate streaming device. Now TiVo provides the ideal platform for them to be able to do that. And what we’re trying to do is integrate streaming with live TV and be able to create a very compelling experience. The advantage also for us is that we can introduce digital ads in that Sponsored Discovery, merchandising of content, and creates a number of opportunities for us to be able to increase revenues and growth for TiVo.
Got it. Thank you so much guys.
Your next question comes from Hamed Khorsand with BWS Financial. Your line is open.
Hi. So just a couple of questions here. The first one is, just given the state of the depth of your Comcast litigation, is that creating any mayhem within getting, capturing new customers as far as the patents and IP is concerned?
No. Since the Comcast litigation we’ve got a number of new license renewals including from DISH, including from AT&T, and we continue the licensing program other than Comcast and some Canadian operators, we have almost all the major players are under license with TiVo.
And the – your expectation for the quarter-over-quarter growth in revenue. Is that related to just the renewal timing or is that actual new customer wins and licensing?
Q4 has historically been a very good quarter for us in terms of new customer licensing.
Okay. And my last question is, does the new guide that you’re talking about creating new revenue opportunities or is this purely just to maintain your customer base?
No, it creates some very significant revenue opportunities. And in fact, I’ll give you an example of – as I said, it creates multiple advertising opportunities. One example is content merchandising. Recently we did a test with our consumer base. We ran the test for about two weeks. We promoted content essentially for about three free streaming movies. We targeted about 900,000 retail and MSO devices. And the click-through response when we promoted this – these movies was about 12%, almost 100,000 devices. And very importantly, what it did was generate about 1.75 streaming hours per responding device. That's really significant and this kind of uplift is what content providers look for and that’s why when I was asked the earlier question I said with this solution that we are trying to build we can create some unique capabilities and monetization potential. And so it will be giving us revenue growth through advertising.
And I would add on that, the key here is our ability to target through recommendations this content and Raghu mentions our three quarters being watched that means these people when they saw the opportunity to watch this movie, it was very relevant to what they were looking for. We think that’s a differentiating feature we have in offering such as sponsored discovery.
Okay, thank you.
And by the way, Hamed, this revenue that we get will be in addition to what we get per subscriber per month from user base.
Okay, that’s helpful. Thank you.
There are no further questions at this time.
Okay, thank you very much and we appreciate your time and thank you for your support of TiVo.
This concludes today’s conference call. You may now disconnect.