VIZIO Holding Corp. (NYSE:VZIO) Q1 2023 Earnings Call Transcript May 13, 2023

Michael Marks: Good afternoon, and welcome to VIZIO’s Q1 ’23 Earnings Call. I’m Michael Marks, Director of Investor Relations. 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 and today’s remarks, a slide presentation can be found on our Investor Relations website at investors.vizio.com. I’ll refer you to the third slide in the presentation and remind you that certain statements made on this call including certain statements about our expected second quarter results, advertising relationships and partners, product rollouts and functionality and future customer demand for our products are forward-looking statements that involve risks and uncertainties.

These risks and uncertainties that could cause actual results to differ materially from these 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, except as required by law. During the call, we also refer to non-GAAP financial measures, including adjusted EBITDA and certain operational and financial metrics. Reconciliations to the most comparable GAAP measures for non-GAAP financial information discussed on this call as well as further information related to guidance, definitions and metrics can be found in our earnings release, which is 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 and all metrics reported on today’s call be for Q1 2023 or as of the end of Q1 2023 as applicable, unless otherwise specified. Now I will turn the call over to William.

William Wang: Thank you, Michael, and hello, everyone. Thank you for joining us today. Q1 kicked off our 21st year of selling, award-winning affordable products and experiences, and we continue to see success in the execution of our combined hardware and software strategy. Last year, personnel challenge on multiple funds, and it was a little surprise to many, the uncertainty in the macro economy environment resulted in pressure across the broader advertising marketplace, particularly towards the end of 2022. As you can see from our results today, our advertising business continued to show strength in Q1, up 24% year-over-year, which delivered upside against our expectations. While these results speak of some general improvement in the marketplace, they also speak to the progress we have made increasing awareness of VIZIO as a skilled destination for advertisers to reach viewers.

By our measure, we’ll continue to gain share within connected TV, one of the fastest-growing areas of advertising marketplace. As viewer share growth and as dollars continue to shift away from linear TV, we remain confident that VIZIO will be well positioned to benefit. Last week, at our third IAB NewFronts presentation between an in-person and virtual audience, we welcomed close to 1,000 partners, advertisers and content providers where we showcased a host of new and innovative ways brands can connect with the VIZIO audience. Since launching our advertising business in 2019, we have broadened our advertising clients beyond just the media and entertainment category to verticals like pharmaceuticals, travel and quick service restaurants, all of which have recently been growing rapidly for us.

We have introduced new advertising units, functionality and sponsorship opportunities, all of which create more inventory for us to manage directly and offer advertisers attractive ad campaign returns. Our active user base of nearly 18 million continues to increase time spent on our building operating system market, hitting a new high of 54% of total time spent on our TV streaming content. By combining the deeper engagement with a robust Inscape automated content recognition data, we can improve the viewer experience and help partners expand beyond traditional ad buying to reach specific audiences quickly and effectively. For instance, as one example, an automotive company recently turned to VIZIO ads to help expand its reach to connected TV viewers most interest in buying [card].

Using our ACR data, the automotive company identified distinct audiences across different TV formats to deliver a more relevant ad experience. A couple of weeks ago, I had the privilege of attending the 74th Annual Technology & Engineering Emmy Awards. On behalf of our team, I would not say to take home an Emmy for our innovative use of ACR technology. This award is a testament to the advances that our VIZIO team has made to deliver better entertainment experiences for millions of viewers. By doing this, we also expand monetization for our content and advertising clients. Speaking of our experiences, we continue to bring consumers more of what they want with expanded content offerings and improved streaming experience. During the quarter, we made enhancements to user interface in our mobile app to help consumer easily navigate the many choices available in streaming today.

We continue to expand WatchFree+, which remains the #2 most watched free ad-supported app platform. VIZIO is in great position to reap the benefit, as consumers continue to shift their streaming consumption habits and look for great [study] from all the great free content on services like our own WatchFree+. During the quarter, we expanded our partnership with AMC Networks, bringing even more premium programming to VIZIO’s smart TVs. The expanded partnership includes the recent addition of the AMC+ app, 93 streaming channels and over 150 on-demand feature films. This quarter, we also expanded our built-in streaming apps from partners like SiriusXM, OWN, Animal Planet, Destination America and many more. Today, we have almost 170 built-in streaming apps on our platform, providing entertainment across many genres.

Turning to our device segment. We are navigating an environment that remains demand constraint, given the challenging backdrop of a slow economy and high inflation. Despite that, we’ll continue to deliver a award-winning product to the market, and our seasoned team remains well ahead of the curve. The value consumer gets when we they our products, has never been greater. A leading technology publisher recently said, when we compare the best budget TVs side-by-side, VIZIO’s picture quality emerge as the leader of the pack. Thanks to the success of our dual revenue business model, we will continue to invest in innovation to elevate our award-winning devices even further. At VIZIO, we are driven by our entrepreneurial spirit and plan to continue to make strategic investments to support an affordable and better TV experience for our consumers.

Our company is centered around a disciplined culture that balances growth with profitability. We continue to maintain a strong and highly liquid balance sheet with no debt, which remains an essential advantage. We remain focused on the key priorities that will enable us to better serve our consumers, leveraging our dual revenue business model to increase our installed base and deliver long-term sustainable growth for our shareholders. Our model of discipline and efficiency, along with the right team, will serve us well as market conditions improve. With that, I will turn the call over to Adam to review our first quarter results in more detail.

Adam Townsend: Thanks, William. Before opening the call to questions, I will take you through our first quarter results and discuss our outlook for Q2. Our first quarter results highlight a key advantage of our dual revenue model. While the device market remains challenged, our expanding presence in the advertising market drove upside to our high-margin platform revenue to result in overall gross profit growth for the quarter. Taken together, total company revenue came in at $357 million, down 27%, while total gross profit grew 4% to $75 million. Platform Plus represented a new high 35% of total revenue and 98% of consolidated gross profit. To provide some additional segment-level context, I will start with Platform Plus. Total platform Plus revenue grew 22% to $126 million.

Advertising revenue rose 24% to $94 million. Throughout the quarter, we saw strong growth in video revenue, which benefited from a combination of deeper user engagement and a steady improvement in advertising demand. Our users continue to increase time spent with our streaming environment as measured by SmartCast hours as a percent of total VIZIO hours, which reached a new high of 54% during the quarter. Said differently, our users are spending most of their time on our TV streaming content within our SmartCast platform. They spend more time on SmartCast than cable TV, game consoles or attached media players combined. This behavior is directly increasing our monetization opportunities in multiple ways, including our home screen advertising, video impressions, data and content distribution.

Among these, advertising is by far the largest component of our Platform Plus revenue, representing 75% of the total for the quarter. And in Q1, we delivered another quarter of strong ad growth of 24%. During the quarter, we also expanded the number of brands we have worked with by 77%, adding 148 net new advertisers. In other returning advertisers, they grew their spend with us by 53% versus the prior year period. So through a powerful combination of more users spending more time streaming, more new advertisers coming to our platform and existing advertisers spending more money with us once they are here, we believe we once again gained share of advertising among CTV platforms with our 24% growth in the first quarter. Our nonadvertising revenue within Platform Plus also showed healthy growth, up 19% to $32 million.

Data and content distribution revenue growth was partially offset by a decline in button revenue due to fewer TV shipments. Turning to our device segment. Total revenue was $231 million. Given continued consumer demand challenges and relatively full retail supply, TV shipments declined 32% to just over $900,000 for the quarter. Total company adjusted EBITDA for the quarter was $7 million, up 52% over the year ago period. As we have stated previously, we remain vigilant in managing our SG&A expenses while continuing to invest in new features and capabilities to drive future growth. We plan to remain focused on operational efficiencies and expense management to allow us to reinvest back into the business to support competitiveness and drive deeper user engagement.

Now turning to our key performance metrics. Our Q1 results highlight the growing success of our efforts to drive overall monetization across our platform. SmartCast ARPU grew to just over $29, up 23% over the year ago period and a new record. Total time spent streaming also outpaced all other times spent by our users as measured by a 19% increase in SmartCast hours against a 10% increase in total VIZIO hours. SmartCast hours per active account grew for the fourth consecutive quarter and was the highest in a first quarter since 2021 just before we started to lap the COVID-related lockdowns of 2020. With enhanced personalization and data-driven content that helps support continued user engagement, our ability to grow time spent and monetizable content continues to increase.

Our SmartCast active account base grew a little over 1.8 million year-over-year to a new record 17.5 million. So with that, let me now turn to what we expect for the second quarter. We are encouraged by the resurgence in advertising activity, particularly by large categories such as pharma, travel and quick service restaurants. We remain cautious regarding growth from the media and entertainment category, and that is reflected in our outlook. While we do expect to deliver overall growth in home screen revenue in Q2, as we have expanded sponsorship opportunities for a wider range of brands, we expect the overall rate of growth will still be heavily weighted to activity from M&E clients. So for Q2, we expect Platform Plus revenue to come in between $133 million and $137 million, representing 22% growth at the midpoint.

This also implies an accelerated growth rate in our advertising business versus the first quarter. We expect Platform Plus gross profit to be $78 million to $83 million, representing a margin of 60% at the midpoint. The expected sequential margin improvement includes the net of an anticipated higher mix of video ad revenue and greater scale against certain fixed operating costs that reduced our margin in Q1. And finally, we expect total company adjusted EBITDA in the range of $6 million to $11 million as we expect to continue to strategically support competitive pricing activities to increase customer acquisition. In closing, we see the accelerated adoption of CTV as a major tailwind to our business. At the same time, with our platform business only being a few years old, we remain in the early innings of this opportunity and are encouraged by its considerable momentum.

We look forward to continuing to support our consumers with a seamless and relevant TV viewing experience and our ad clients with vast possibilities to deliver impactful advertising campaigns. With a commitment to efficiency, productivity and discipline, we are excited about the opportunities that lie ahead. With that, let’s open the call to questions. Operator?

Q&A Session

Operator: [Operator Instructions] Our first question for today comes from Laura Martin of Needham.

Operator: Our next question comes from Ben Swinburne of Morgan Stanley.

Operator: Our next question comes from Vasily Karasyov from Cannonball Research.

Operator: Our next question comes from Steven Cahall of Wells Fargo.

Operator: Our next question comes from Michael Morris of Guggenheim.

Operator: Our next question comes from Cory Carpenter of JPMorgan.

Operator: Our next question comes from Jason Kreyer of Craig-Hallum.

Operator: Our next question comes from Nick Zangler of Stephens.

Operator: Our next question comes from Tom Champion of Piper Sandler.

Operator: Our next question comes from Wamsi Mohan from Bank of America.

Operator: Our final question for today comes from Jim Goss of Barrington Research.

Michael Marks: Thanks, Jim, and thanks, everyone, for joining. This concludes today’s call. Have a great evening.

Operator: Thank you for joining today’s call. You may now disconnect your lines.