Vizio Holding Corp (VZIO) 2021 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Q2 2021 VIZIO Earnings Conference call. (Operator Instructions) I would now like to hand the conference over to your speaker today, Mr. Michael Marks, Investor Relations. Sir, you may begin.

Good afternoon, everyone, and thank you for joining us for our Second Quarter 2021 Earnings Call. Joining me for today's discussion are William Wang, our Founder and CEO; and Adam Townsend, our CFO. Also joining us for the Q&A portion of today's call is Mike O'Donnell, our Chief Revenue Officer for Platform+. Please note that in addition to our earnings release, a slide presentation for you to follow along with our remarks can be found on our Investor Relations website at investors.vizio.com. I'll refer you to the second slide in the presentation and remind you that certain statements made on this call are forward-looking statements that involve risks and uncertainties.

These risks and uncertainties that could cause actual results to differ materially from those forward-looking statements are discussed in more detail in our filings with the SEC and our press release that was issued this afternoon. We undertake no obligation to revise any statements to reflect changes that occur after this call. During the call, we also refer to non-GAAP financial measures, including adjusted EBITDA. Reconciliations with the most comparable GAAP measures for non-GAAP financial information discussed on this call can be found in our earnings release or on the Investors section of our website. Note that all quarterly comparisons in today's remarks will be made on a year-over-year basis unless otherwise specified.

Now I will turn the call over to William.

Thanks, Michael, and hello, everyone. Thank you for joining us today. Our second quarter results were excellent, driven by strong advertising growth, the direct benefit of our dual revenue model. In the second quarter, we'll continue to invest throughout the organization in talent and innovations to improve our user experience, increase our monetization opportunities. So far this year, we have added nearly 200 new jobs across the company to support our rapidly growing CTV business.

These investments accelerate the growth in our Platform+ business this quarter, where we generated our highest ever year-over-year increase in ARPU. The high-margin revenue from our platform business now provides a great complement to our device business. Overall, during the quarter, we increased revenue, gross profit and adjusted EBITDA, even in the face of the pandemic and the challenges it continues to bring to so many industries. Adam will provide further details later during the call. But I'd like to commend our team on their focus and efforts to produce these exceptional results during this unusual time.

Throughout the quarter, our seasoned team worked closely with our various partners to minimize the logistical and supply chain disruptions. This is a moment where experience and great leadership really pay off. At VIZIO, we have a long history on investing in innovation, which has led our ability to bring great products to consumers, featuring the latest technology at affordable prices. And our commitment to this core principle has never been more relevant than today. The rights are streaming and explosion in content traces has resulted in a surge in consumer demand for quality entertainment experiences.

We are meeting this demand by investing in an extraordinary collection of Smart TVs account with our built-in streaming platform, SmartCast. SmartCast streams billions of hours of multi-content across SVOD, AVOD and free ad-supported streaming channels, all through one easy-to-use interface. No need for consumers to go buy another bundle or a box to stream their favorite shows. We're complementing TVs with a range of market-leading soundbars that feature the latest surround-sound technologies to deliver a big-screen experience in the comfort of their home.

Each spring, we have a product refresh where we deliver our new collections to the market.

We use this as the time to deliver our latest technology at the most affordable prices. For example, this year, we added to SmartCast a new functionality called VIZIO Voice. VIZIO Voice allows users to more quickly search and discover content within SmartCast by simply talking to the TV. Most of the latest models now come with our new Bluetooth-enabled VIZIO Voice remote. We also continue to ensure broad IoT compatibility with support for Apple AirPlay, Amazon Alexa and Google Assist.

This year's TV collection includes a number of picture quality enhancements, including greater brightness, expanded color spectrum, and higher contrast ratios with a broad lineup featuring our Quantum Dot technology. We also further strengthened our position in the rapidly growing gaming market with over half of our TV collections now being AMD FreeSync certified.

The new products have been very well-received by channel customers seeing high Star review ratings by consumers as well. For our Smart TVS, this recognition ranges for our entry-level D series all the way to our premium models. Just to name a few examples. Our D series was recognized as editor’s choice for 2021 in U.S.A. today's review. And our premium older model won the [Tankai] award for 2021.

In addition, new features such as our VIZIO Voice capability has been recognized by influential publishers such as CNET. Our diverse range of soundbars also continue to receive awards from highly respected outlets, with our premium Atmos models being featured in Newsweek and Wired. All this recognition helps strengthen our brand and consumer awareness, which ultimately help drive market share.

As I mentioned earlier, we are building for the future with significant investment in people and software to drive our Platform+ business. We have added to our advertising sales and content acquisition teams in New York and Los Angeles and nearly doubled the size of our engineer teams in Denver and Dallas. We have invested heavily to make SmartCast faster and easier for users to find the content they want.

Speaking of content, we've been very busy. As you may have seen just yesterday, we announced that we have reached agreement to bring 2 new marquee apps to our platform: BET+ and Discovery+. We are thrilled to offer these premium content apps to millions of SmartCast users. BET+ is available now and Discovery+ is targeting a September launch.

Today, I'm also very excited to announce another addition to our content lineup. FuboTV will be joining our platform in the coming weeks, just in time for football season. SmartCast users will be able to subscribe to this virtual MVPD service right on our home screen. In addition to FuboTV, we have also launched streaming apps from Hallmark, PBS, The Space Channel and LEGO TV and our WatchFree service added 32 more free ad-supported channels during the quarter. So to say the least, it has been a very busy time for our company acquisition team. And there's so much more to come.

On the back of all this content, we use our opt-in first-party data to gain insight into our users' preferences. The investments we have made into our integrated hardware and software and specifically our ACR technology help inform us on the content to source on the best opportunities to enhance search, discovery and ultimately monetization. All of this leads to more personalization and a better overall user expense.

A great example of how we put this data inform insights to work is our new generation of WatchFree, now called WatchFree+. WatchFree grew quickly over the past few years, it is super popular with our VIZIO audience and became a major source of video advertising revenue on our platform.

The newly improved version now takes the success to a new level. WatchFree+ will bring our audience a cable-like TV experience with a newly designed program guide, enhanced search and discovery option, and data-informed programming. This newly enhanced version of WatchFree+ is happening at an exciting time for our Platform+ business. In less than 2 years, the market awareness of our advertising capability has gone from largely unknown to a significant player in the CTV ecosystem.

We just recently closed our first upfront season with commitments from blue-chip advertisers, networks and dozens of brands new to us. We have now established partnerships with all the large media buy agencies in the U.S., who are recognizing the value of our unique and engaged audiences. So with all the investments and improvements we have made over the years in software, products and most importantly, people, we're excited about a path we're on at a transformative time in the industry.

Now I will turn the call over to Adam to discuss the details of our second quarter results.

Thanks, William. At VIZIO, we see change as our opportunity. The way in which media and entertainment are being distributed and consumed is undergoing a dramatic evolution, and we are ideally positioned to capitalize on it. As people are seeking a more immersive home entertainment experience, we are there for them with our award-winning Smart TVs and soundbars, all at an attractive combination of quality and price. And as media companies and advertisers are looking for effective ways to attract and reach viewers, we offer them our award-winning streaming platform, SmartCast, to host their content and provide high-value advertising solutions that directly benefit from our rich and first-party data.

Our direct opted-in relationship with our users allows us to better understand their tastes and preferences. This as well as our integrated software and hardware structure is a key ingredient to our success. As you heard from William, the investments we have made, particularly over the past several years, have transformed our business and positioned us for continued growth through an expanded range of monetization opportunities. While we are still early in this transformation, our second quarter results clearly demonstrate the benefits of our strategy and our dual revenue stream model.

For the quarter, total company revenue was up 2% to $401 million. Platform+ revenue grew 146% to $66 million, representing an acceleration from the already strong growth rate we saw during the first quarter. Advertising revenue grew fivefold to $47 million, driven by an increased demand of our home screen inventory and growth in the number of monetizable ad-supported apps and FAST channels on the platform, including our own service, WatchFree. And we continue to leverage our valuable first-party data to increase personalization. More personalization helps us drive higher CPMs across video and the home screen inventory, as well as to grow off device ad monetization.

With greater scale and broader awareness of our advertising capabilities, we doubled our direct advertising customer base this quarter versus a year ago and more than tripled our average revenue per advertiser. As a result of these strong trends, we have now generated more advertising revenue in just the first half of 2021 than we did during all of last year. Non-advertising revenue on our Platform+ segment grew 2% to $18 million, driven by increased content distribution fees as well as a return to growth in data licensing primarily due to our recently announced deal with Verizon Media. This was partially offset by lower sponsored button revenue, which is primarily a function of TV shipments in the period.

Turning to our device segment. Revenue of $336 million was down 8.5% year-over-year, which is not unexpected, given the unique surge in demand from stimulus checks and the stay-at-home orders at this time last year. Higher average unit prices for both smart TVs and soundbars helped to somewhat offset the difficult unit volume comparisons for TV. Soundbar shipments grew by a strong 79% year-over-year. Total company gross profit grew 37% to $80 million, with Platform+ gross profit of $47 million and device gross profit of $32 million. Platform+ gross profit grew 167% year-over-year and surpassed device gross profit for the first time. Strong overall growth in advertising with a larger mix from our higher-margin home screen inventory than last year contributed to Platform+ gross profit margin of 72%. As anticipated, device gross profit declined on lower Smart TV shipment volume of 1.1 million units versus 1.6 million a year ago.

This can primarily be attributed to the surge in demand during this time in 2020 and the industry-wide supply and logistical challenges that we referenced in our last earnings call. Those challenges this year led to a push of units out for the quarter. The good news is consumer demand remains robust, and average unit pricing continues to shift higher. We are also working closely with our suppliers and distribution partners to increase product inventories throughout our retail channels. Device gross profit margin for the quarter came in at a solid 9.6%. Total operating expenses grew $88 million from $35 million a year ago. While we are making significant investments to build out our engineering and ad sales teams, the bulk of this increase is related to share-based compensation expense.

Excluding share-based compensation, SG&A expense was $43 million compared to $28 million a year ago. Share-based compensation expense in 2021 will remain elevated due to the 1-year amortization associated with certain grants made in connection with our IPO back in the first quarter. We would expect our share-based compensation expense to moderate in 2022 as the amortization associated with these grants rolls off. Share-based compensation is also leading to an abnormally high effective tax rate due to the compensation expense disallowance requirements. We also expect this dynamic to normalize in 2022 for the same reasons.

Total company adjusted EBITDA, which excludes share-based compensation, grew 7% to $27 million. And finally, net income for the quarter came in at a loss of $14 million or $0.08 per share. We continue to maintain a strong balance sheet with high liquidity and no outstanding debt. Quarter ended cash and equivalents totaled $365 million. During the quarter, we also renewed and extended our $50 million credit facility, which now matures in April of 2024.

As William mentioned earlier, the investments we've made in people, product and technology is paying off and generating strong returns across the business. Perhaps nowhere is this more evident than the growth in ARPU this quarter, which grew 16% sequentially and 90% year-over-year to $16.76. While we are pleased with this exceptional growth, we continue to make investments in our platform's features and capabilities that we believe will drive this metric much higher over time.

Even with consumers returning to their daily lives, we continue to see strong growth in engagement year-over-year. Total hours spent on VIZIO TVs grew 22% to 7.2 billion, and SmartCast hours also grew 22% to 3.5 billion. Time spent on SmartCast continues to represent the majority of how users spend their time on our Smart TVs, a trend that we expect to continue as streaming adoption expands, and we continue to bring more and more content to the platform. SmartCast monthly active accounts grew 43% and ended the quarter at 14 million.

Let me now turn to what we expect for the third quarter. Starting with Platform+. We see continued strong monetization trends with accelerated demand for our advertising video inventory and home screen promotion. In Q3, we will just start to benefit from our new advertising upfront commitments and an improved monetization model under WatchFree+. Through the new version, we will now more directly control advertising inventory, and we'll also use our first-party data to drive more personalization and deeper engagement, all leading to more effective monetization going forward. So based on what we know right now, we expect to generate third quarter Platform+ revenue in the range of $76 million to $82 million, representing continued triple-digit growth year-over-year. We expect Platform+ gross profit in the range of $55 million to $60 million, while maintaining a similarly strong gross profit margin to what we delivered in the second quarter.

For device, we expect to see sequential growth in TV unit shipments in the third quarter over the second quarter as we continue to replenish low channel inventories and benefit from sustained demand. Of course, we will likely be lower year-over-year as we lap the anomaly of last year's pandemic driven surge.

Speaking more broadly, while the industry-wide supply chain dynamics have resulted in some delays and challenges, based on what we know today, we expect these constraints to have a relatively modest impact on our full year shipment volumes. As a partial offset to this, we do expect a continued upward trend in average unit pricing due to strong demand and growth in our mix of more premium models and larger screen units.

We've also recently expanded our distribution relationship with Amazon, which we think strengthens our alignment with the growth and share gains within this online sales channel. Lastly, we expect total company adjusted EBITDA to be in the range of $20 million to $25 million. This range contemplates our expectation for both continued investment to support growth in our Platform+ business as well as an anticipated move toward more normalized gross profit margins for our TV business. So overall, we're very excited about the progress we're making on multiple fronts. And as I mentioned earlier, we are ideally positioned to capitalize on the trends we are seeing in the marketplace. With that, let's open the call up to questions. Operator?

(Operator Instructions) Your first question comes from the line of Steven Cahall with Wells Fargo.

Thanks. So maybe for William and Adam, the first one, the growth in video and SmartCast hours, I mean it slowed a little bit in the quarter, but I think that's no big surprise on reopening. It looks like Roku had a similar trend. I was maybe a little more surprised that SmartCast hours as a percentage of the total VIZIO hours did fall a little bit sequentially. I was wondering if you could just unpack that trend a little bit. Maybe this is a mix issue as you're selling larger TVs, people are watching more sports on their cable box. So any color you have there? And if you expect that long-term trend to revert back to increasing share of SmartCast hours? And then on the platform ARPU, that was really outstanding. I was just wondering if you could unpack that a bit with the strength from home screen, or higher ad loads, or ad pricing, or data, or all of the above. And any color as we think about modeling ARPU going forward would be helpful.

Adam, do you want to?

Yes, sure. Steven, yes, look, I think in short-term period, you may see some fluctuations in some of these metrics relative to each other. But over the long term, I think we certainly see an ongoing continued trend towards the adoption of streaming, which is going to increase over time on a secular basis. So to your point, yes, in terms of SmartCast hours for the quarter, we were down about 3% sequentially. But I would step back and put that in a little further context because obviously, there's oddities in the market as we're coming off of a COVID dynamic.

If you look back at 2019, our SmartCast hours per active account, we grew 25% relative to 2019 if you sort of adjust back to pre-pandemic dynamic. So I think that's an important context as we think about where this is going over time. Programming differences, availability of live events, sports, that can cause little movements between total VIZIO hours and SmartCast hours.

But we think that the trends we're seeing from our users continue to adopt more and more behavior on the platform. We're bringing more content to them. We're thrilled to be bringing now Discovery+ and BET and Fubo is going to be coming on. So I think the availability of what they're looking for from a streaming standpoint is only going to continue to expand, and that creates significant monetization opportunities for us.

Mike, do you want to hit on some of the mix on that?

Yes. I think on the ARPU side, I mean, we saw the largest trajectory of growth in the advertising side of the business. Obviously, both home screen and AVOD. But I think a lot of that growth comes from the fact that, look, we're 19 months into monetization of our platform. So we've moved now into an established player in the marketplace. And coming out of the initial IAB new fronts we did this year, leading into the upfront season, we've been able to establish much deeper relationships with our partners. On home screen on the media and entertainment side, we continue to drive new solutions for them, help them drive new users, active users as well as grow engagement. They're responding by continued investment. And then on the AVOD side, our ability to have this direct sales team build stronger relationships with agencies, has helped us drive much larger deal sizes and increase our CPM significantly year-over-year.

Your next question comes from the line of Cory Carpenter with JPMorgan.

This is Katy on for Corey. So earlier this summer, you talked about reaching over 11 million addressable TVs across the U.S. that enable glass-level dynamic ad insertion. Can you just talk more about the progress you're making here? And what do you see as the opportunity overall down the line?

Yes. I think I'll take that one. Yes, we're excited to continue to grow the scale on that front. And we think DAI is a great opportunity. Today, it's relatively small, but we see a good opportunity to increase the scope of that in the future as we build out our relationships with networks. I think when we look at how we work with partners like networks, I think Discovery+ is a good example of how we can create a rainbow of monetization effect for VIZIO, right? We're working with them, obviously, through this new deal, through Discovery+ app, plus some additional portfolio apps that will be coming on the platform through ad economics and subscriptions.

But really, we can build a more holistic partnership. They are a key partner of Project OAR and we'll continue to work with them to help as they bridge that gap between linear to streaming. We’ll continue to help them support and bring solutions that can help them grow revenue on both sides. And in turn, that will help us continue to grow the revenue on our front.

Your next question comes from the line of Michael Morris with Guggenheim Securities.

Maybe to expand on that question a little bit. The -- I'm curious if you can share anything about sort of the depth of your relationship with kind of Tier 1 or some of the larger publisher network content partners and then some of the smaller content owners or controllers who may be a bit more dependent on you for their advertising infrastructure. And so I guess the root of my question here is, when you look right now, how much of your ad value is driven from your smaller content partners? And what's the path to maybe expand those relationships with the Tier 1 partners, kind of like you just discussed on Discovery+, but maybe across a broader portfolio? And then second, on the last call, Mike discussed this concept of some branded sort of like original or branded, very specifically created content. I'm wondering if you have any update on how that's progressing.

Yes. So in terms of the scope, I'll take that one. In terms of the scope of our relationships, look, we're -- as we continue to invest, we're continuing to invest not only in the ad sales portion of the business, but also in the business development side, right? So our relationships over these past 2 years have continued to expand both with, I think, as you described, the smaller Tier players as well as the Tier 1 players in the marketplace. As we continue bringing on new partners in both Tier 1 and on the smaller side of the platform, we'll continue to focus on building a strategy that helps both of us monetize on our platform. And I think we'll continue to have those same discussions with partners that have historically been on the platform as well.

In terms of branded content, we actually, in terms of what we describe as VIZIO features. So leveraging the data we have, our first-party data to help identify what people are watching or what's being most watched within our platform help inform content and channels that we can bring to SmartCast or specifically our WatchFree service.

We rolled out this last quarter, VIZIO Fork & Flight, which is tremendously successful. It focuses on food and travel and is based on viewership habits of the consumers, and we target them specifically on the home screen to be able to drive up monetization within that. And we're recently rolling out VIZIO Investigations, which is focused on crime drama as well. So continuing to build momentum there, and we foresee adding -- continuing to add more channels or more branded content in the future.

Your next question comes from the line of Dan Medina with Needham.

Congratulations on a terrific quarter, William and Adam. I was just wondering, maybe just being a little more broader in terms of the off-platform monetization opportunities and sort of what are the features, technologies and data that you guys are bringing to this opportunity? And how is it leading to where you would like to be in the next several quarters?

Yes. I think all platform monetization is an exciting opportunity for us. I mean I think when you look at this past quarter and consumer habits, people are starting to get out of the house. They're starting to travel more, head back to the office, get out of the house, right? So, we want to be able to continue to arm our sales team as they build these relationships with brands with new solutions, new opportunities that leverage our core differentiator, which is our first-party data. So I think we mentioned on the last call or talked about our relationship with Verizon, in which we marry our first-party television data with their device graph in order to create off device solutions in the market. We rolled that out this past quarter, and it was very well received by the partners we have. So we see this as a good opportunity. It's just -- we're just getting it off the ground. We think it's going to have good momentum, especially heading into next year, but it gives us more tools for the sales team in the bag to go out and continue to grow the relationships we have with advertisers and brands.

Yes. Dan, it's Adam. I just want to add to that. I mean, this is a perfect example of where we're investing. So when we talk about investing in engineering resources, ad support capabilities, this is a perfect point where we're not just limited to what we're doing on device and the footprint that, that provides, but off devices well to your very point. And so it expands our view of what our TAM is in the overall marketplace, which brings a lot of different opportunities to partner with different ad buyers and partnerships in the marketplace. So that just expands the opportunity for monetization beyond just the footprint of our installed base. So it's an area that we're really looking at and putting some significant resources behind.

Great. Then again, congratulations on a great quarter.

Your next question is from the line of Wamsi Mohan with Bank of America.

This is [John] asking on behalf of Wamsi. I have 2 questions. First, do you expect the headwinds on the device side from supply chain issues to continue? And if so, maybe for how long do you expect that? And on the Platform+ side, could you share the progress on incorporating the payment interface? And do you have any update on the progress around dynamic advertising insertion?

John, on the device side, we have COVID-19 going on. It's really hard to predict what's going to happen to next. But so far, the -- the device, the IC shortage and the component shortage are getting better from -- for what we see right now. The logistic issues is getting a little better as well. So we do see the headwind being less, but there's a lot of -- we now have a delta variant. It's kind of unpredictable. So we don't know exactly what's going to happen. But so far, we're seeing less component shortage than before. Adam?

Yes, I could add to that a little bit. As you can imagine, we work really closely with our partners, both on the supply side, the logistical teams as well as our retail partners to try to mitigate the impact of all of this. And I think our team has done a phenomenal job of doing that. And we talked last quarter about moving some units out of Q1 and into Q2 and back half of the year as a result of some of this. And so we're managing through that. I just want to be clear that, that is contemplated within our guidance that we provided today. So as I think about the volume that we're going to have, the top of the funnel in terms of units that are coming through, how that rolls through our financials, we've contemplated some of these challenges.

Now that's based on what we know today. If there's incremental news, then we'll consider that and work with our partners going forward. But as we sit here today, we have thought through that. We have some visibility about where things are headed, and we have considered it in our overall forecast for the year.

And then on dynamic ad insertion. Yes, I think Mike talked about it a little bit earlier, and I think it's really small in terms of our contribution today, but we're excited about where it's going. One of the things, as you mentioned here, VIZIO PAY, moving that back on to our platform, that's an area we're also investing heavily with our engineering resources. We are gearing up to be able to have a launch of that capability later this year.

And what that will do for us is it will improve the economics in terms of the distribution agreements and the subscription revenue agreements we have with the various SVOD and AVOD partners. And so we are not fully monetizing those relationships today, as you can imagine, because we're not in a position to facilitate those financial transactions. But once we are capable, that only benefits us as we look forward.

So it's a feature and capability we think that also adds stickiness to our customer relationships, extends the value that we provide to them and create a great all-in-one destination to manage their subscription services, and we can do it with better economics over time. So stay tuned, more to come on that later this year.

And your final question comes from the line of Tom Champion with Piper Sandler.

Adam, maybe to begin with you, just the platform gross margins were a little stronger in the quarter than we were expecting and looked pretty strong from the guide. And I'm just curious, is there anything temporal or onetime in there? Or is it -- is the business just maybe performing a little bit better? And curious if that impacts any of your thoughts on kind of accelerating investment on the platform side of the business? And then maybe for Mike O'Donnell, I'd love to hear you talk just a little bit more about the Verizon partnership and the opportunity for deepening kind of personalization there and how long it will take to fully explore that opportunity over time? Any thoughts on that would be really helpful.

Yes. Why don't I start with the first one? So look, I think we're continuing to be very pleased with the strong gross profit margin that we're seeing on the platform business. The mix of business can have some contribution to that. This quarter, we had really strong growth in our home screen monetization. Home screen comes through at an even higher incremental margin than our video advertising does. So that mix was favorable this quarter.

By and large, overall, we continue to see very strong margins in the business. And as I indicated, for our third quarter guidance, similar type of margins to what we saw in Q2. Over the longer term, as we tap into larger new pools of revenue, like I mentioned before, the subscription service, those come through with a different margin profile to them. And we've thought about that and talked about that in terms of our long-term projections. But there's no doubt this platform business is going to continue to be a very strong, high-margin contributor to the overall mix. Gives us a lot of financial flexibility to help complement our device business.

And then with regards to the Verizon partnership, I think I mentioned, for us, the opportunity to go off device has been a great benefit to the sales team as we continue to grow those relationships with brands and agencies. What our -- what Verizon relationship does is help us build what we call our household Connect product. And really, what that does is help us expand the reach of a brand's message that hits our televisions and drive it into the personal digital devices of our customers so that we can hit them with an ad on the television when they're in the home or when they leave the home as they get back out there. So today, it's a good opportunity for us to start to build those relationships around this product with our advertisers. But in the future, we see all device opportunities, leveraging our data to be a good driver of revenue in the future.

Thanks, Tom, and thank you, everyone, for joining. This concludes today's call. Have a great evening.

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