Vizio Holding Corp (VZIO) 2021 Q4 法說會逐字稿

Good afternoon, everyone, and thank you for joining us for our fourth 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 Michael O'Donnell, our Chief Revenue and Strategic Growth Officer.

Please note that in addition to our earnings release, a slide presentation 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 in 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. This is the first time we get to the staff a year together. I'd like to take a few minutes to talk about some highlights on 2021 and then Adam will give more details on Q4 and full year results.

2021 was a transformational year for VIZIO. Our IPO was almost 1 year ago. And since then, we have continued to see success in the execution of our combined hardware and software strategy. We invest in talent and doubled employees from 400 to more than 800 employees, mostly in product and engineering expertise to accelerate innovations for our integrated hardware and software business. While we're continuing to sell millions of connected devices to Americans, we also packed a lot of new programming functionality into every TV to improve the experiences for our new and existing customers.

And we've grown a national sales organization that has strengthened our dual revenue business model. We accomplished all of this growth and innovation while maintaining a strong balance sheet and positive cash flow. Now that is not easy. Such achievement requires a tremendous amount of discipline and expertise.

I want to thank our team for making this happen year after year. This year marks VIZIO's 20th anniversary. We're continuing our history of delivering quality products and incredible value to customers. It is also our sixth year of owning both the hardware and software experiences and perfecting the relationship between the 2.

The value consumers give when they buy our products, has never been greater. And I'm happy to say that we have maintained our market share position for full year 2021 as the top 3 Smart TV brand and the #1 selling Sound Bar brands in the U.S. Going to the holiday season, we focused on promotional efforts on the big screen and high-end products that drive greater engagement and ARPU. Our strategy was paid off with strong shipments for TVs in the 50-inch and above class.

The deals we leveled have normalized. We are executing on aggressive pricing strategies to increase demand and enhance our market position and our products remain highly competitive in both quality and value. The combination of our total revenue business model and healthy inventory dynamics, puts us in the position of competitor trends heading into 2022 and we intend to continue to leverage that strength and implement additional pricing tactics as we push to increase market share.

We are excited to launch a new collection of devices (inaudible) this week and will start hitting shelves in the spring. And our new collection is a really earning awards. VIZIO was named a CES Innovation Award Winner by the Consumer Technology Association for the new products, including our M-Series Quantum X 4K HDR Gaming Smart TV, which delivers the highest frame rate available on a picture-perfect 50-inch screen for fast action play.

The VIZIO M-Series elevates 5.1.2 Sound Bar, which is a speaker, more affordable elevated Sound Bar, featuring patented award-winning audio technology and the latest version of our operating system, SmartCast was recognized for improved user experience with new voice capabilities and the updated program guide.

Award-winning product added great value to our VIZIO (inaudible). We have also improved our WatchFree+ service with addition of over 5,000 hours of premium top content partners such as Disney, Lionsgate, Sony Pictures and Samuel Goldwyn. And we continue to expand our free and premium ad-supported content options.

WatchFree+ is the second-most watched ad-supported app on the SmartCast platform. Nearly 50% of our SmartCast users are watching WatchFree+. Our data-driven features, channels are fast-becoming favorites, and we recently added even more big-name apps like discovery+, Sling TV and the collection of apps from A+E networks.

So while stream content consumption continued to grow and the streaming wars heat up, VIZIO provides a front-row seat and content for everyone. Q4 was another quarter of record ARPU growth, which continues to exceed even my expectations. The VIZIO ad business had a tremendous 2021 and is not a key part of the ad ecosystem in the U.S.

We significantly grew our relationships with agency customers, and grew revenue from key ad categories, including insurance, retail and auto. We expanded our offerings and relationships with media and entertainment companies that need VIZIO to help drive subscriptions and tune in.

As people move to streaming, brands need to find those audiences, and we are able to deliver them. And with our TVs as anchored for brand experiences and Viewing Data, we are building our Household Connect, which allow us to sell ad experiences across other devices.

We are also finding more opportunities for advertising to be part of the experience and introducing new kinds by advertising units and sponsorship opportunities. This creates more inventory for us to manage and better revenue optimization of our platform.

A key differentiator for VIZIO is our data. Years ago, before streaming became a household word, we made the investment to develop the best source of opt-in glass-level ACR data in the market, and the benefits of our data go beyond the enhancement to richer content experience on our own swings.

Granular TV viewing data is increasingly important to the $70 billion plus linear TV industry. And VIZIO's 7 years of experience in producing market-leading opt-in glass-level data (inaudible) revolution. 5 out of the 7 leading TV management companies are powered by VIZIO Viewing Data. When combined with streaming data, VIZIO Viewing Data supports more effective advertising investments and strengthen the historically-challenged TV measurement space.

And I'm excited for the future of additional data monetization opportunities for our shareholders. In 2022, as our team celebrates VIZIO's 20th year in the TV market, we are seeing the investments in a dual revenue stream and the strategic integration of hardware and software pay-off. We expect to experience expertise and the discipline that help us build a great company to propel us forward and to drive growth and the maintenance of a healthy balance sheet.

We have lots of happy consumers that use our products at home and lots of heavy partners that can use our data and advertising to grow their businesses. And as we head into our second year as a publicly traded company, we look forward to the next 20 years of delivering quality and value to consumers.

With that, I will now turn the call over to Adam to speak to our fourth quarter 2021 results in more detail. Thank you.

Thanks, William. I'll focus my comments today on the fourth quarter performance and then discuss our outlook for Q1. Full year 2021 results are available in our earnings release and the investor presentation on our IR website. Fourth quarter total company revenue came in at $629 million. This total represents the blend of our dual revenue model, where Platform Plus revenue grew by 74% to $105 million, while Device revenue of $524 million faced headwinds from logistical latencies and elevated product demand comparisons to Q4 2020.

Our growth in Platform Plus revenue was driven by advertising, which grew again by triple digits, up 111% to $82 million. Advertising revenue consists of video impressions both on and off device and our powerful home screen units. During the quarter, we unlocked even more monetizable home screen inventory to sell to advertisers by adding category page hero banners and additional sponsorship opportunities.

Demand remains very strong across video and home screen, as we continue to expand our relationships with ad buyers and become more known in the marketplace. During the quarter, we experienced strong growth across numerous ad categories, including insurance, retail, automotive and media and entertainment.

Our industry-leading opted-in first-party viewing data remains a strong point for advertisers who are increasingly looking for better performance with their spend. In fact, around half of all ads we run are now targeted based on our first-party viewing data. And the only way for advertisers to use this capability with guaranteed ad delivery is to work directly with our ad sales team.

Further, our data is fueling the rapid growth of our key-off device product, Household Connect. This product is expanding our TAM beyond our device installed base and bringing new buyers into our ecosystem as they seek impactful performance-based ad solutions on digital inventory across devices, including mobile.

For the quarter, advertising revenue represented 78% of total Platform Plus revenue. Non-advertising revenue, which today primarily includes data licensing, branded buttons on our remote controls and content distribution fees grew 7%. The growth rate in our non-advertising revenue is now -- has now improved in each of the past 3 quarters following the strategic shift in our data licensing model late last year. We expect this growth trajectory to continue in 2022, as our pipeline for new data deals is strong, and we have several existing deals coming up for renewal.

For device, Q4 Smart TV shipments totaled 1.5 million, marking 2 consecutive quarters of sequential growth following the second quarter low. As I'm sure you've heard from many companies, market conditions remained challenging during the quarter, and our team worked diligently to improve channel inventories, which have been light coming into the quarter.

As William mentioned, their work throughout the quarter put us in a much stronger position coming into Q1, which will now allow us to be more aggressive and increase our competitiveness going forward. In the past month, we have deployed aggressive promotion pricing on key TV models that we know over index in terms of engagement levels and ARPU opportunities.

To that end, we lowered the price on our 50-inch V-Series units to $299 in early February and has been the #1 selling 50-inch TV in the country for the past 2 weeks. Of course, aggressive promotions like this have an impact on gross profit margins. As indicated last quarter, we view our rapidly growing high gross profit margin Platform Plus business as a strategic enabler to lowering margins in TV to drive customer acquisition.

For the quarter, total company gross profit was $77 million, with Platform Plus gross profit of $67 million or about 87% of the total and Device gross profit of $10 million. Platform Plus gross profit dollars grew 39% year-over-year. Total company adjusted EBITDA for the quarter was $17 million, which was well ahead of our expected range.

And finally, net income was a loss of $10 million or $0.05 per share, impacted by stock-based comp expense as well as higher R&D and SG&A costs, as we continue to ramp up investment in software development and overall engineering capabilities in particular.

Turning now to our key operating metrics. Our Q4 results highlight the growing success we are experiencing in driving overall monetization. ARPU grew to a record $21.68, up 67% over the year ago period. Our ARPU is benefiting from numerous factors, including, as I mentioned earlier, greater awareness of VIZIO in the marketplace, which translates into expanded overall demand and more targeted campaigns, which deliver higher CPMs as well as our continued enhancements to WatchFree+ that are driving improved monetization.

On a year-over-year basis, total VIZIO hours grew 20% to $7.9 billion, and SmartCast hours grew 11% to $3.9 billion. While SmartCast hours per user are still down year-over-year as we lap the dynamics of 2020, we did see a return of sequential growth in Q4 in absolute terms.

So far in Q1, we are seeing further strength in engagement trends. For example, in January, SmartCast hours per active account were up nearly 10% from the average during the fourth quarter, which already tends to be a seasonally strong period. This is a particularly encouraging stat on the heels of a number of recent enhancements we've made to the platform, including additional content, features like video on demand, better search results for apps and much more.

Our active account base also continued to show solid growth with a 24% increase in 30-day active accounts, ending the quarter at 15.1 million. Let me now turn to what we expect for the first quarter. Starting with Platform Plus, we are realizing the benefits of our strategic planning and actions this past year and the trends we are seeing thus far indicate another strong growth year ahead.

We see continued strength in demand for our advertising inventory and expanding growth opportunities in our largest non-advertising revenue source, data licensing. The market is hungry for our data, and we are in a great position to serve. Taken together, we expect Q1 Platform Plus revenue in the range of $90 million to $95 million.

We expect Platform Plus gross profit in the range of $57 million to $60 million, implying a margin of 63% at the midpoint of the range, steady with Q4 levels. For Device, we expect to benefit from our improved inventory position across sales channels.

As we all know, certain dynamics in the market are still somewhat uncertain, but we believe we have the right products and the right strategies to increase our competitiveness. We are working closely with our retail partners on promotions and merchandising tactics to move units, being particularly aggressive early in the year.

We are also working closely with our ODM suppliers to secure volume commitments at competitive pricing. Lastly, we expect total company adjusted EBITDA to be in the range of a loss of $2 million to a gain of $2 million. In summary, 2021 was a pivotal year for VIZIO. From the strategies we deploy to the investments we made in people, systems and products, we believe we are only scratching the surface of the opportunity that lies ahead.

In 2022, we will continue to invest in additional platform enhancements for viewers, advertisers and content partners alike. We will continue to invest in talent to drive growth throughout the business. We expect to develop new monetizable capabilities and deploy technologies to drive greater efficiencies.

As we have often said, we believe the opportunity has extraordinary and we will continue to allocate resources to ensure we capitalize on the tremendous industry shifts ahead. With that, let's open up the call to questions. Operator?

(Operator Instructions) The first question comes from Laura Martin of Needham.

Let's start with EBITDA. So really strong EBITDA in the fourth quarter, it looks like most of it was -- your operating expenses were about $6 million lower, or better, I guess, than we expected. But then the EBITDA guidance for Q1 feels like it's worse or low (inaudible). So is there something going on between the 2 quarters in terms of just some expenses shifted from Q4 to Q1 potentially?

Yes, Laura. It's a great question. So there's some timing dynamics with expenses such as marketing is an example as well as some of the other personnel expenses and SG&A as we're going through the quarter at the end of the year. But this is overall part of our broader strategy that we've been talking about in terms of being willing to bring down margins on Device to increase our competitive in the market.

We're doing that more aggressively here in Q1 on the back of the fact that we now have good strong channel inventory levels. Now that we have units in the market, we can go out and work with our retail partners to promote and merchandise and move more products to help drive customer acquisition, as I mentioned in the remarks.

So it's just a dynamic of that. It probably eases a bit as we go through the year. And this is probably the most -- the lowest level that we would see for the year. And so -- but as a part of that overall broader strategy, I do want to emphasize that on the Device side, we are expecting to have lower single-digit like margins.

I'll remind you that the margins you saw that we had over the -- during the pandemic period were elevated due to some of the dynamics that we all talked about, right? High demand, excessive demand, pull down of inventory, no need to promote or market products or cut pricing. And so it was kind of a typical period where we had double-digit margins in our Device business.

That was never sustainable. We were very, very clear about this, but this new strategic position then puts us in a better place to help grow and drive the flywheel into our Platform Plus business.

Okay. And then my last question -- my second to last question is this issue of data. Both you and William talked about the growth of data, and you said that 87% of your Platform Plus revenue was -- thank you for giving the $82 million, I guess, about 78%. My question is, do data step up a lot in the quarter and should we see that continue into 2022?

It did step up a bit in the quarter, but I think it's more of a driver into 2022. We've got a pipeline now of a number of previous multiyear deals that are coming up for renewal for the first time in a while. Our data has only become more valuable in the marketplace since we originally did those deals.

And then we have a few even larger deals with particularly new clients coming into that as well. So I see data as a growth driver returning in 2022. As you know, we pivoted our strategy around data a year ago, and that reduced some of the near-term growth as we shifted off into a new strategy. But that strategy helped us drive growth in our advertising business as well. So that's really where the offset is. Now we're in a position where both sides are going to be growing simultaneously.

Yes, I think Mike, I was going to add 1 thing. Just I think in the marketplace today, the driver of this data licensing business is all the buzz around this next generation of TV currency products in the market, right?

We've got incredible experience with data. We've been in the market for almost 8 years. And that's really important to note as the industry starts to shift to these new currencies, you heard a lot of talk around NBCU, Warner Media, Disney, looking at new outcome-based solutions. We are the core foundational currency-grade data that's powering these currencies of the future. So it's an important business for us moving forward.

The next question comes from Michael Morris of Guggenheim.

Two questions. One, I just wanted to dig in a little more on the sort of unit sales and the outlook side of things. You talked about the stock levels being back to sort of pre-pandemic. But based on the Device revenue in the quarter, it still seems that the ultimate sales are soft.

And then you also referenced some promotion going forward. So can you just maybe connect the dots a little bit on where the bottlenecks still are in terms of getting units into people's homes? And also what we should read into the kind of end demand side on the promotion. So maybe I'll start with that and then I want to ask you a question about WatchFree+.

Yes. Thanks, Mike. So what I was trying to articulate is that we spent a lot of time during the quarter building up channel inventories that were light as we came into the fourth quarter. And so some of the latency in the system has been easing a bit, but it's still challenging, as you're hearing from many companies.

So a lot of the work was done to bring channel inventories up to what I would call healthier more normalized levels, which means that we're in a position of about 6 to 8 weeks of forward demand inventory. We entered the quarter at a much lower level and had bottomed out, as you know, back in the July time period.

So that helped us move into that position. And to William's comments earlier, now that we have that strong position, it allows us to be more strategic with what we want to do about pricing, promotions to move units. It's hard to deploy those kinds of tactics when you don't have a strong stock position.

And so now that we're there coming into Q1, you're starting to see us do that, and I referenced the example of the -- our 50-inch V-series TV, where we made a pretty aggressive price move on it and immediately started to sell through at a very nice level and became the #1 selling 50-inch TV in the market.

Those kinds of tactics you can do once you have a strong stock position. So we're going to continue to manage that. There are still some challenges in the market. We know that. We have some of our units -- some of the smaller units are still stuck on vessels and slow to get through the ports and we'll just continue to work with all of our partners to try to mitigate that as much as possible. But we are in a significantly better position coming into 2022 in terms of channel inventories.

Okay. And then you referenced 50% of SmartCast users now are watching the WatchFree+. Can you talk about either how much time they're spending or how the engagement has been trending? And I don't know to the extent you can maybe frame how much more valuable it is for you to have time spent on the WatchFree+ app as compared to time spent, maybe on another app where you might still get an ad split or something like that, but isn't completely controlled by you.

Mike, you want to take that?

Yes. I'll take that. So look, WatchFree+ as we positioned before, I think is the biggest growth engine for our advertising business is where we continue to invest. So we effectively made WatchFree+ an unavoidable app on the platform, right? We got a ton of touch points whether it be remote, navbar, custom carousel, the app itself, but also the promotion that we put behind WatchFree+ on our platform and that enables us to drive a lot more viewers into the service.

We've invested a lot in the service over the past year. In August, we made a big transition to bringing in a new UI to controlling more of the content experience, adding new features. We most recently just added AVOD or video on demand into WatchFree+. So we're continuing to innovate the service. We're continuing to put support behind it from a promotional aspect.

And we think it's going to be the key driver for us in the future. But that entails us continuing to push up more engagement time spent within there as well as continue to generate more active users on our platform of WatchFree+.

Yes. And Mike, let me just add 1 other point in context. Now when you think about the advertising portion of our ARPU, the growth of that comes from a few different factors, right? Higher CPMs, more impressions into the home screen and where people are actually spending their time, which is your question.

So all-time spent is not created equally. If someone is spending time in WatchFree+, that's the great place for us to have them. If they're spending time in non-ad-supported apps, that doesn't help us quite as much. So when you look at our growth in ARPU which was up 67% year-over-year, our SmartCast hours in that same time period rolling up 11% and our active accounts are up 24%.

So it shows that the monetization is occurring because we're getting that flywheel effect of each of those components that contributes to overall ARPU. So the monetization exercise is working incredibly well at this point.

We now have a question from Nick Zangler of Stephens.

Hey guys, great Platform Plus results, great Platform Plus guide. I did want to dig in on some of the hours here. So VIZIO hours increased 20% year-over-year. SmartCast hours increased 11%, so that penetration rate of SmartCast fall to 48.7%, which is lower than the results you've had over the last year.

So I guess I would have expected a higher penetration rate here given all the new streaming services that you've just added late third quarter all throughout the fourth quarter. So I'm just wondering if you could help me understand some of the discrepancy in that thought. And maybe you'd be willing to provide any details on those non-SmartCast VIZIO hours. What specifically are the sources that make up that 51%? I mean I imagine it's cable, it's use of players, sticks and dongles and access to VIZIO games systems, but maybe you'd be willing to size some of those up for us.

Yes, Nick. Sure. Yes, it's an interesting dynamic. Look, we're coming off of a couple of years of pretty atypical behavior, right, with the pandemic and the lack of original content coming from the traditional linear content providers. So it's hard to know exactly what normal is.

We've been growing our overall hours. We're very pleased with that. We're driving them to the point earlier into the content where we monetize best, that's what's going to contribute to our ARPU growth more than hours by itself. So that's an important dynamic. And we're using our home screen. We're using our data to drive people into and using search results to drive people into the content where we can both meet their needs and what they're looking for and monetize for ourselves.

So we'll continue to track this and monitor it very closely. I mean it is roughly, give or take, back in the peak during the pandemic, it was SmartCast hours as a percent of total was about 52%. It's come down to 49%, 48% right now in the last few quarters. So again, I don't know what normal is yet. But we know we're bringing a great value proposition to the consumer, allowing them to watch the content across whatever inputs that they want, and we benefit from that from a data standpoint, from an overall active monetization standpoint.

Great. And then it seems like everybody wants to have their own TV these days. So I'm just wondering if you could maybe just take some time to talk about in your mind, the advantages, the unique advantages that you guys have by owning both the operating system software and the Smart TV hardware in the context of supply chain challenges that we're facing right now but even over the years to come from a more long-term perspective.

Yes, good question. I don't -- I can't imagine anybody who want to build a power without building software details. And today, the IoT world need both to impress and to maximize the consumer experience. And again, we've been doing TV for almost 20 years now. And I think we (inaudible) market, we paid a lot of attention to understand (inaudible) what not to do. And I really don't believe in the separation of hardware and software. We're here to build a final product on consumer in order for any consumer to -- in order for us to maximize consumer experience, we need to control both qualities and we integrate it together.

So we've been doing that for the last 6 and 7 years. But we've been working on Smart TV for more than 11 years. And 11 years ago, we actually tried to run operating system from somebody else. And end of the day, it did not work. So we're going to stick to our hardware and software indication -- integrated solution. I believe this is the feature for anybody who want to build Smart TV.

We now have Cory Carpenter of JPMorgan.

I have 2, both on advertising, maybe for Mike, just hoping you could talk more broadly about the trends you're seeing in the ad market. We've certainly heard from a lot -- others around headwinds from inventory from certain categories. Curious if you saw that at all? And then you did mention off-platform advertising a couple of times in the prepared remarks. So hoping you could just assess how big is that today on maybe some of the stuff that you're doing there?

Yes. So I'll start with kind of the categories we're seeing. Look, for -- for us, we're starting from, at this point, smaller dollar pools on the marketplace. So it's tough to afford, we're really only 2 years into monetization.

So we still have a huge run rate ahead of us. So today, from a category standpoint, media and entertainment is our largest category. We continue to see strong momentum and we expect there to be strong momentum in this category for the foreseeable future.

There's always going to be new and existing shows to promote. There's always going to be the need to drive subscriptions. There's new apps coming into the market. And they need us to help with audience attention, share of voice, new subscribers are reducing charts.

So that business still is our largest and continues to grow. But we've really done a great job, especially over this past year and expanding to new pools of categories. And our overall growth is really much more broad than the media and entertainment category today. And we saw that in terms of lifts in insurance, in retail and automotive.

While there is pressure on some of these categories today in the marketplace, for us, as we continue to ramp up, as we continue to push our value prop in the marketplace, we continue to be able to grow these categories, and we expect to continue to do that this next year.

In terms of Household Connect, look, it's an exciting product for us. What it does is it effectively allows us to coordinate, I'll call it omnichannel campaigns that can run across TV, mobile, desktop and really what that does is allows you to see an add on TV and re-message those consumers, whether they're inside of the home or outside of the home, right?

It's important to us because we know most consumers aren't spending a lot of time or are spending a lot of time across multiple different platforms. So this allows our campaigns to be more coordinated and help improve the outcomes we see effectively for our advertising partners. But it's really important because it helps us expand our TAM, right? We have an incredible advertising sales team in the marketplace and this gives them more and more opportunities to sell all of Device.

I said in the past, we don't necessarily have a demand problem, right? For us, we want to be able to generate as much supply across our on-platform as well as off-platform so we can deliver against that demand. And our Household Connect has continued to expand and grow as we've invested, invested more and more.

We just announced a deal with TransUnion. This brings in their identity and marketplace products into our Household Connect platform, which already had our, we say, best-in-class or largest ECR dataset in the marketplace as well as the very large device graph from Verizon or Yahoo!. So we're continuing to innovate and expand on the Household Connect offering and we expect to continue to push forward with that in the marketplace.

In terms of any guidance around what that looks like, at this point, I think we're not ready to share that. But we'll say that we expect it to see some good growth from this product in this next year.

The next question comes from Wamsi Mohan from Bank of America.

Yes. On the Device side, you indicated your intentions to be more promotional. Can you talk about what sort of growth you're hoping to drive in TV units in '22 versus '21, assuming that the inventory levels are better? I know you're talking about driving increased promotional activity. But -- if you look at TV units in 2021 versus the past 2 years, I know there were some pandemic benefits and some of the lower-end TVs were used as monitors. But how should we be thinking about the absolute level or maybe growth rate of TV units as we look into 2022? And I have a follow-up.

Yes. Look, if you look at sort of pre-pandemic 2019, we shipped roughly 6 million units. Obviously, there was a surge in 2020 in the early days of the stimulus and the pandemic impact. 2021 really took the brunt of supply chain challenges and logistics challenges, right? There was a hangover that came into the year in terms of chip supplies, panel, supplies, freight, trucking, every element of the supply chain was challenged in 2021.

We do think that those challenges did peak during the year, and we've seen some easing and various elements of the supply chain dynamic, certainly on the component side, much, much better. Logistics continues to be still a bottlenecked to a certain extent. So we're going to continue to monitor that. But I think the expectations broadly in the market, even those challenges start to ease some people predicting midyear. I don't want to make a prediction. But certainly, doing it as a peak challenged year in '21.

So if you went from pre-pandemic at the 6 million range, up towards 7 million during 2020 and then back down to mid-5 million units in 2021. We certainly think that now with our channel inventories, now with the strength of our product lineup, the capabilities we're bringing to the market, the features and what we've added to SmartCast and our ability to promote that, we think we should be able to see a return to growth in new shipments.

Okay. That's helpful. And then -- on the Platform Plus side, when we think about the gross margins, clearly, there are lots of moving pieces here, and I know you're investing quite heavily in the business. How should we expect the trajectory of gross margins in 2022 here? And any color you can share around the back-end work that you've done around payment integration, how that's progressing?

Sure. Yes. Look, I mean, clearly, as we expand the pie of our opportunity on the Platform Plus side, there are going to be revenue sources that come with a different margin profile. For example, some of the off-platform stuff that Mike was just talking about, by nature, has a lower margin than (inaudible), like, for example, home screen, which has a very, very high margin.

So we're looking at ways to drive growth in both areas to help create offsets and maintain a very strong margin. We guided for Q1 -- low mid-60% gross margin for the quarter consistent with Q4. So I think we're doing a nice job of finding that balance. I'm not going to apologize for 60-plus percent margins. I think it's a really fantastic business. But what's great about where we're headed is that we're expanding the pie, we're expanding the TAM. That's going to generate additional total dollars. If the margin directionally starts to edge down over time, again, we're going to manage that, so it's not dramatic, but it's a natural thing that's going to happen as the business becomes more complex and has more components to it.

One component is exactly what you're asking about is on the subscription billing side. That, too, will have a different margin and a lower margin profile than say home screen advertising, just by way of the -- of the dynamics of what that business is. But again, we want to be in that business. We think it increases stickiness for the consumer. It brings an even better value prop to them. It's a great value profit and customer acquisition vehicle for our content partners.

We now have content partners lined up to bring their apps to our service because we can start to fulfill the billing for them. Premium cable is a great example of that. They want that capability to launch on our platform. So all of this just comes to a collective increased value to our partners across advertising, our partners across content and obviously, our consumers. So we're going to continue to work very closely and manage what that margin looks like.

We now have the next question from Steven Cahall of Wells Fargo.

Maybe first, William and Adam, one of your peers has kind of said that they think that the connected TV operating system market is going to consolidate down just a couple of players. And so it sounds like they're going to spend a lot of money this year in order to compete with that. I was just wondering if you could give your perspective on how you think the operating system market is going to play out and how you think about kind of cost and EBITDA margin as you manage through that investment process?

Yes, I'll take the operating system. The operating system market in connected TV is pretty solid. So we have Samsung, which is unlikely to switch to another operating system. They have their own. LG has their own. And so we have our own and Roku is a vendor operating system to a Chinese domestic brand like Hisense or TCL and also Google (inaudible) operating system (inaudible) and also reasonably Comcast joining the camp. I don't -- I don't see like a PC or a cell phone come down to 2 operating systems at this particular time.

And it will happen, probably what happens through our time, but not immediately because it's unlikely -- it's really unlikely to shrink by 7 operating systems, all have like over 7%, 8% market shares down to 1 or 2 immediately in the future. The EBITDA, I will leave it to Adam.

Yes. Look, Steve, I think one of the benefits, obviously, of controlling both the hardware and the software is that we have that full control over what those costs look like. And so I don't think EBITDA is necessarily -- trends in EBITDA are not necessarily a function of competition on the OS side.

What we're really focused on is growing and developing our dual revenue model, which will, over time, help us improve EBITDA profitability. Obviously, we're in a period now where we're transitioning from elevated EBITDA levels because of the pandemic to more normalized and then maybe even lower as a result of being more aggressive. But once you baseline that, the high profit margin of the Platform Plus business and the growth trajectory that it's on starts to shift that back the other direction and improve overall consolidated EBITDA.

So I think about it as really managing the 2 sides of the business to work in tandem to have that strategic benefit.

Great. And then, Adam, maybe just on the SmartCast net adds. I know sometimes if we look at that conversion rate of TV shipment to net adds and that was pretty good versus what we expected in Q4. I know that there's some churn that's always baked into there. So I was just wondering if we could extrapolate anything out of what you saw in Q4 into 2022 or any other trend lines in there?

Yes. This is another example where we're managing through some atypical dynamics that have happened in the marketplace. So active account growth is a function of both sell-through as well as shipments, right? And so we look at those 2 together in a normalized environment, they'd be pretty close together. There wouldn't be a material difference between the 2. But over the past 2 years, we have seen some divergence based on dynamics in the market. For example, back in 2020, those huge demand rush with the stimulus checks and everything that went out there as a drawdown, so sell-through outpaced shipments in that period.

This year was sort of the opposite where we had the different dynamic in the marketplace due to availability of inventories. And so looking at that attachment rating has moved from north of 60% back in '19, '20, down to sort of 45%, 50% sort of in that range this year. What is normal? It's hard to say, but I think it's probably more in that 40% to 50% range. I'll remind you, newly sold TVs, we know become active accounts to the tune of 90-plus percent. So currently sold TV is converted very high. We've got a big fleet that goes back to 2016.

There's bound to be churn and by now, as you mentioned, in that base. And as that base gets bigger, that churn number changes, right? So that's another thing that we try to manage. We're looking very closely at keeping customers engaged, how do we bring the right product in, how do we bring the right content, how do we engage them in marketing to make sure that we reduce the churn over time so that we sell more units, then we're able to continue to improve that metric. But I think generally speaking, as you look forward, we'll probably be in that type of range in terms of the attachment metric.

We now have Tom Champion of Piper Sandler.

Adam or William, I'm curious if you could just talk a little bit more about the promotions you referenced in the script and the thought process behind those. Just curious, this is kind of offensive in nature to go out there and grab market share and stimulate sales or whether it's more defensive in nature and responding to dynamics you're seeing in the market? Just curious if you could provide some additional color and context there? And maybe a second 1 for Mike O'Donnell, if I could. Your advertising business is still nascent but rapidly scaling up. And I'm just curious how you think about goals and priorities in the '22 big picture?

Tom, yes. So the promotions effort is obviously a highly collaborative one, right? This is 1 where we work really closely with our retail partners to find some mutually beneficial dynamics to it, and our team has been doing this for a very, very long time and have deep relationships across all of our key partners.

So I would characterize it as probably offensive initially. You never know if it's defensive until you know what other people are going to do, right? But we've seen immediate benefit -- when we got aggressive in the example I used earlier on our 50-inch. We're going to look at other models throughout our lineup to do similar actions because we know that certain units tend to over-index as I mentioned in the prepared remarks in terms of engagement and ARPU opportunities.

And so we want to lean into that. And because, again, the whole goal of it is to get more units in the home, but the kind of units that help us drive ARPU and deeper engagement with our customers. And so we're going to be pretty tactful about what units we want to lean into and get aggressive on and look at what that means for the overall fleet. What competitors do, we'll have to see and assess and see what that looks like. But we know we can move the market. We've got a great high-quality product at a great attractive price. And when that price comes down a little bit and gets you more in line with some of those lower-cost leaders, the quality to price ratio skews very favorably for the consumer. So we're going to continue to work with our partners and make that as effective as possible.

Yes. And I'll just touch on the priorities and goals. Yes, it's -- it's a relatively new business in the market, as I shared, but I think we're -- from a fundamental standpoint, we still want to continue to grow our advertiser base, right, which we did this past quarter, 20%, and that includes over a political year last year and continue to grow the revenue per advertiser, which we did over 70%.

I think the way we're going to continue to do that is one, continuing to be out in the marketplace, not only evangelizing the value prop that we can bring from an addressable standpoint, leveraging the ACR first-party data we have in the marketplace, continuing to bring new products to market like Household Connect that give us the ability to expand our TAM and deepen our relationships across multiple devices.

And then we're continuing to invest on the advertising side, not only in the SmartCast platform and WatchFree+ but also in ad tech and ad technology tools behind the business. So we've built out a strong product and engineering team over the past 6 months. That has helped us continue to increase fill rates, continue to increase CPMs, expand Household Connect, as we talked about, but also start to build new ad tech tools and products.

So recently, we're leveraging our first-party data to provide planning tools to the markets for advertisers. We've got this great ACR data. We can help inform them what's happening in linear, so they can leverage bias on our platform to drive incremental reach and frequency against their target audience. So we'll continue to invest not only in growing the engagement on the platform to support the advertising sales team, but also continue to invest in ad tech.

We now have the next question from Vasily Karasyov of Cannonball Research.

My questions are about advertising revenue. You mentioned earlier on the call that CPMs increased. So I was wondering if you could talk about what the drivers were for each of the advertising revenue, I mean, sell-through versus volume versus CPM? And then is it fair to assume that as video advertising grows as a percentage of your Platform Plus revenue, the gross margin will be coming down because of where it sits compared to, let's say, sponsorship or home screen advertising?

Yes, I take the CPM growth and then Adam can touch on the gross margin component. But in terms of where we saw advertiser CPM growth, when I speak specifically to that, that's within our video inventory on Device is continuing to grow and expand. And a key component of that is now roughly 50% of the video revenue that we're generating is coming off of leveraging our ECR data. Our ECR data, having that core foundational first-party dataset enables us to drive better outcomes for our customers, but also enables us to drive higher CPMs in the market.

So that's a big function of where that CPM growth is. Also, the marketplace continues to be more competitive. Advertisers are having tougher and tougher time getting their money down in linear television. So that's continuing to drive up demand in the streaming space or the connected TV space, and we're a beneficiary of that.

Yes. Look, and as I mentioned earlier, certainly, as the pie expands and as we increase the range of revenue opportunities that we have in the Platform Plus business, particularly your question about advertising, certainly, there's going to be some dynamic around what that means for the gross profit margin.

But we anticipate it continuing to be a very strong high-margin business. Obviously, home screen is a range, right? Home screen is our highest margin monetization, On-device video is going to be high as well. And as you go off-device, as I mentioned earlier, that's going to come in a little bit lower margin, but that's okay because that expands our TAM. And so we want to have a broad-based diversified revenue mix that really helps to benefit our advertising partnerships and help them bring more and more of their budgets. Don't forget, these advertisers are looking for ways to get to viewers on CTV platforms. Dollars are coming out of the very large linear TV marketplace, which is a $70 billion marketplace.

There's dollars coming into CTV out of digital as well. If we have solutions for them, we're going to be able to capture a part of that pie, albeit at slightly different margins, and that's okay. So we want to position ourselves to be known in the marketplace as a destination for these buyers that are looking for viewers in this marketplace.

A quick follow-up, if I may. Why off-screen advertising stream is a lower margin? Can you quickly explain?

Yes. So why Household Connect a lower margin because we don't control or own the inventory off-platform. So we are leveraging the data we have on our screen. We are leveraging some on-device advertising units, but then we're going out and the mobile, desktop and tablet we're buying out (inaudible) marketplace that we're attaching to these campaigns.

So there's a little bit of a lower margin because we have to lay out costs to go grab that inventory.

Our final question today comes from Scott Searle of ROTH Capital.

The overall device market is going through normalization, right, in terms of the spike during the pandemic, complicated with supply chain issues, which seem like they're normalizing, certainly not normalized. And as we're getting back to that, I was wondering if you could provide a little bit more clarity and visibility to the seasonal aspect in the first quarter? Typically down 30% or so, but we're not in a normalized environment. I would imagine it's lessened given the supply constraints that existed in the fourth quarter and that we're 2/3 of the way through, I was wondering if you could give us a little bit of guidance on that front? Then I'll have a couple of quick follow-ups.

Yes. Look, I think the dynamic, as you described it is fair. And the difference for us right now is that we're coming into the first quarter period with a stronger general inventory position and that's going to allow us to do some of the tactics that I talked about earlier.

So Q1 had some promotion opportunities, for example, around the Super Bowl, right? So we were heavy participants in that environment, and we're going to look to continue to move products. So I think we should have a relatively strong hand to play in the first quarter that possibly would overshadow sort of normal seasonality trends.

Got you. So bottom line is, given the current environment, less seasonality than normal should be performing a little bit better in the first quarter?

That would be my anticipation.

Okay. Second, on the payments front, billing e-wallet kind of capabilities. Could you update us in terms of the timeline of when you expect to see more widespread commercialization on that front? And how we should think about that in terms of milestone metrics and defining success in '22 and '23?

Yes. In terms of the road map schedule, we're on schedule. We plan to launch our VIZIO tools to the marketplace mid-summer this year. Right now, we have the Partner Portal open. So we're working directly with partners to integrate them into the system so that it's available for consumers.

We do expect that to help us not only generate a higher take rate but also create a better one-to-one relationship with our consumers. But I think we're -- we're really excited about with VIZIO (inaudible) it's kind of a foundational element or I would say, backbone of the future of television. And it's critical that we get Vizio (inaudible) on to the platform so that we could start to build those foundations as the future of TV comes about.

Lastly, if I could. Yes, Scott, I was just going to say that it's going to take a little while to ramp that up. I'm excited that you're excited about us launching it as am I. But it will take a little while to get the word out. It will take a while for consumers to adopt it and begin to start transacting on it. So to Mike's more important point over the long term, having that foundational infrastructure in place is really the key. That allows us to expand a lot of different monetization opportunities and we're going to be building those out over time to come. But for the back half of this year, expect a modest ramp up, just to be conservative.

Perfect. And Adam, just to wrap up, the Platform SmartCast is at scale now, but there are a lot of investable opportunities, whether it's payments, billing, Household Connect, other opportunities. So how should we think about your -- from a very high level, managing the EBITDA and profitability in that business in '22 and '23? I wonder if there are any metrics that we should be thinking about in terms of target EBITDA over the next couple of years?

Look, as I've said it before, we are in a growth phase and there's an opportunity here to get out and grab consumers and gain households. And so we are not in, what I would call, EBITDA maximization mode. We're in capability investment.

We're going to broaden the feature sets that we have on the units. We're going to devise tactics to gain market share and device sales. All of that collectively coming together to only control more households and help us drive long-term growth. So we are investing in personnel. We're adding more software development engineers. We're adding more capabilities throughout the organization to support this growth because we really think this is a transformative moment in the media space where being in the center of that and being already in a place where consumers are going around a connected, integrated Smart TV, the future is strong for us, so we need to make sure we can execute and have the right team to do it.

Thanks, Scott, and thanks, everyone, for joining. This concludes today's call. Have a great evening.

Thank you for joining. This does conclude today's call. You may now disconnect your lines, and enjoy the rest of your day.