VIZIO Holding Corp. (NYSE:VZIO) Q3 2023 Earnings Call Transcript

VIZIO Holding Corp. (NYSE:VZIO) Q3 2023 Earnings Call Transcript November 9, 2023

VIZIO Holding Corp. beats earnings expectations. Reported EPS is $0.06903, expectations were $0.02.

Michael Marks: Good afternoon, and welcome to VIZIO’s Q3 2023 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 will 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 fourth 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 will be for Q3 2023 or as of the end of Q3 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. Our third quarter result demonstrates that VIZIO’s continued focus on high-quality products and innovative user experiences is driving strong gains in user engagement and platform monetization. This in turn, is driving our continue outperformance in advertising revenue in the connected TV space. I remain exceptional proud of our season team that continues to execute well. Despite some market uncertainty, VIZIO delivered another strong quarter with 27% growth in advertising revenue. All growth was driven by large ad categories such as insurance, QSR, retail, and CPG. Importantly, we are delivering growth in an efficient and scalable fashion, which is reflected in VIZIO posting the third consecutive quarter of record total company gross profit margin of 22.6%.

Total company adjusted EBITDA came in above the high end of our guidance range, even as we continue to invest in spending a multi-pronged growth strategy. There’s no doubt that we are seeing the fruits of these investments paying off, as we have built up our platform resources across engineering, software development, and advertising tax, and sales. VIZIO has made tremendous progress in driving monetization. Over the past few years, we have learned much about user engagement and behavior trends, which inform about TV lifetime value. Growth in engagement drives SmartCast ARPU, which grew 14% during the third quarter to a record $31.55. Just two years ago, this was under $20. So we have come a long way in a brief time, yet we believe there is still continued room for future growth given the strong consumer shift to streaming.

Given these monetization tailwinds, we are further refining our device strategy and emphasizing larger screen sizes, which tend to be the primary TV in the home. We expect these larger units will generate greater economic value over the long-term. We have historically seen stronger engagement matches such as streaming hours and lower churn with our larger TVs, which together drives higher ARPU. We believe that building a higher quality install base and investing in the right skills, we’re going to focusing on overall shipment volumes, will best position us to drive sustainable growth and profitability over time. Additionally, over the past few years, we have been continuously retooling and enhancing our operating system to unlock further growth opportunities.

Through these investments, our latest version is even faster and more responsive. With an improved user-friendly experience, address engagement, and customer satisfaction. We have also reached a stage where we believe we now have the software and experience to help other TV manufacturers within their platform solutions. For the first time, we are beginning to explore potential partnership opportunities with other TV OEMs who have been looking for an alternative operating system to help rule their CTV footprint in the U.S. Our deep expertise with integrated hardware and software provides distinct potential for mutually beneficial outcomes for VIZIO and future partners. This will take some time to work through the details with potential partners, but we are excited to open up this additional growth opportunity for VIZIO.

Turning to our device segment, it should be no surprise to hear that TV environment has been hyper-competitive over the past quarters, which has had an impact on our market share. In the meantime, with financial discipline, we’ll continue to focus on what we can control, which includes offering higher-quality TVs at a price that deliver exceptional value to the consumers. We recently rolled out our all-new Quantum 4K QLED in 65-inch for impressive $499 and 75-inch for $699. For that value, consumers can experience exceptional picture quality and premium gaming features. Consumers can also elevate their personal entertainment experience with one of VIZIO’s premium sound bars. Reviewers recently rate that consumers will be hard-pressed to find another MOS-enabled sound bar for under $500.

And of course, this new TV collection comes with fast entertainment experiences right out of box. No dongles needed. Everything comes built-in. Our consumer can experience the recently added ESPN app, including ESPN Plus, along with almost 200 other building streaming apps, including our own WatchFree+. Within WatchFree+, we offer users over 290 free ad support of streaming channels, and over 15,000 on-demand titles spanning a wide range of genres. So, as we look towards the future, we’re excited about new growth drivers and the opportunity we see ahead for continued growth. Well, VIZIO has already come a long way. I still believe we are in the early innings of what a smart TV can become. Our focus on building a quality user base through our award-winning products comes with the potential for incredible upside.

With the right team, the right products, and the right user experience, all at a right time. I’m more excited now than ever before for VIZIO’s future. With that, I will turn the call over to Adam to review our third quarter results in more detail.

Adam Townsend: Thanks, William. Before opening the call to questions, I will take you through our third quarter results and discuss our outlook for Q4. Our third quarter results demonstrate the benefits of our strategic focus on driving improvements in the quality and engagement level across our install base. Through this focus, we are seeing steady growth across many key metrics that we use to track the usage of and engagement with our platform. I will provide more detail on these metrics in a moment. But first, for the quarter, total company revenue came in at $426 million down 2%. This was through a combination of lower device revenue of 12% on lower TV unit volumes and lower average unit price, partially offset by higher Platform+ revenue, which grew 22% on continued strength and advertising.

Again, benefiting from the rapid growth on our high margin Platform+ revenue, total company gross profit grew 20% year-over-year to $96 million. Gross profit margin expanded by 423 basis points to 22.6%. As William mentioned, this was our third consecutive quarter of record consolidated gross profit margin. Platform+ represented a new high of 37% of total revenue and over 100% of consolidated gross profit dollars. Total adjusted EBITDA came in at $27 million, well ahead of our expectations, benefiting from more judicious price promotion on device, capitalized software development expenses, and continued growth in high margin advertising revenue. Net income totaled $14 million, up from $2 million in the year ago period. While the retail environment has presented a number of challenges this year for many, I don’t want to lose sight of the financial performance we have delivered so far this year despite these challenges.

Through the first nine months, total gross profit grew 14% with a 480 basis point improvement in gross profit margin, and adjusted EBITDA grew 59%. Our advertising revenue grew 28% to over $300 million for the first time ever, and total company net income improved to $15 million from a loss of $7 million for the same period a year ago. Now to provide some additional segment level context for the third quarter specifically, I will start with Platform+. For the quarter, Platform+ revenue came in at the top end of our expected range, and gross profit exceeded our outlook. This upside was due to stronger than expected home screen revenue, which along with the previously mentioned capitalized software expenses also helped deliver higher than expected gross profit margin.

Our strong Platform+ revenue growth of 22% was driven by a 27% increase in advertising revenue. We are particularly pleased with the continued strength of our advertising business given some of the softness being seen across the broader advertising marketplace. As we have said before, we are participating in the fastest growing part of the advertising market and continue to take share within that market. We expanded our direct advertising relationships by 20%, adding 66 net new advertisers, and the returning advertisers increased their spent with us by 29% versus the year ago period. As we bring more content to our viewers and utilize enhanced personalization tools, as well as an improved search and discovery experience, we are seeing continued growth and engagement.

Growth in time spent streaming outpaced all other sources on our TVs during the quarter. SmartCast hours are proxy for streaming time, grew 21% to 5.2 billion hours compared to a 10% increase in total VIZIO hours. On a proactive account basis, streaming hours totaled 290, the highest quarterly level we have seen in almost three years. Not surprisingly, this growth in streaming time came at the expense of linear video viewing, where time spent on cable declined by six percentage points. So taken together, SmartCast hours as a percent of total hours during the quarter reached an all-time new high of 58%. Said differently, our users are spending more time streaming through our SmartCast operating system than watching content on cable TV, broadcast, game consoles, and attached media players combined.

Our non-advertising revenue within Platform+ also showed healthy growth up 8% to $33 million. Data and content distribution revenue growth was partially offset by a decline in button revenue due to fewer TV shipments. In Q3, our SmartCast ARPU grew 14% to a new record of $31.55. As William mentioned, we believe our strategic focus on driving a higher quality install base will only help accelerate this metric further. One way we aim to support this approach is through strategic unit pricing. Since we see about a 30% higher engagement level from larger size units, this is where we intend to concentrate our pricing investments going forward. Lastly, total SmartCast’s active accounts grew 1.3 million year-over-year to a new high 17.9 million. Turning to our device segment, total revenue was $270 million.

TV shipments declined 8% to just over $1 million in the quarter, with our average unit price down 8% as well, compared to a 12% decline in the overall TV industry. In audio, sound bar shipments rose 19% versus the year-go period, along with an 11% increase in average unit price aided by strong demand for our higher-end products in our lineup. With these results, we improved brand share within the sound bar category to 19.3% from 16.7% a year ago. And finally, our balance sheet remained strong and highly liquid. We ended the third quarter with cash and short-term investments of $335 million and no debt. So with that, let me now turn to what we expect for the fourth quarter. For Q4, we expect Platform+ revenue to come in between $162 million and $167 million, representing 20% growth at the midpoint.

We expect Platform+ gross profit of $97 to $103 million, representing a margin of 61% at the midpoints. And finally, we expect total company adjusted EBITDA in the range of $7 million to $16 million. As we head into the seasonally strong holiday season, we remain confident that we have a compelling product lineup in the market with strong channel inventory levels across the major retailers. We will focus our pricing strategies to align with sell-through of units that help to best drive our business. 2023 thus far has been a year of tremendous progress and execution against our strategy. We have transformed our financial profile, resulting in steady growth in customer engagement, our highest gross profit margin, and record ARPU. As we looked at 2024, we could not be more excited with the many opportunities we see ahead.

From the potential for new revenue and active account growth through our operating system partnership initiative, to the continued overall shift to ad-supported streaming, all the way to what is expected to be an all-time high in political spending, VIZIO is well-positioned to continue to build on the investments and successes of 2023. With that, let’s open the call to questions. Operator?

Operator: We will now begin the Q&A session. [Operator Instructions]

William Wang: Operator, we will take the first question.

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Q&A Session

Operator: The first question comes from the line of Nick Zangler with Stephens. Please proceed.

Nick Zangler: Hey guys, another solid quarter of Platform+ growth, so congrats there. Device margins though, you know, under incremental pressure. And I think just in general, investors are concerned about the ongoing decline in those device margins. I’m wondering at what level do you see these device margins leveling out and when that might occur? And then just for the meantime, maybe you could talk about balancing negative device margins with active account growth and your view of the lifetime value of a customer just to provide a better understanding of why you’re willing to absorb negative device margins in the near term?

Adam Townsend: Yes, I’ll take that. Thanks, Nick. It’s Adam. Yes, I think it’s really important what you said there at the end, frankly, is we think about how this model works and how we drive growth and overall economics over time and the lifetime value of a customer. To your point about device margins going negative in the quarter, look, we’re trying to balance being competitive while also being disciplined. We have been operating in a very extreme competitive environment lately, more string than many in this industry have been in a long time of seeing. And so, we want to make sure that we are competitive but being thoughtful about how the economics overall business work. And that may mean foregoing some volumes in the immediate term because we don’t want to chase some of the really extraordinary pricing that we’ve seen.

The way I think about it is more from a system economics standpoint, because you can’t really think about our device business as a standalone business separate apart from our platform business. They work together, we manage them together, and all of our strategies and financial approaches take that into consideration. If you look at just on a year-over-year basis, I think the point about our gross profit margin continuing to expand and hitting actually a new record for us in the quarter speaks to that point. I mean, on a year-over-year basis, device gross profit margin came down about 160 basis points, but we expanded total company gross profit margin by over 400 basis points. So it’s working together. We think that’s the right approach. We want to focus on driving quality accounts that are going to be highly engaged.

The right units for our model will drive increased profitability and economics. We’re now approaching a $32 ARPU on this population with a 60% gross margin. So when you think about a lifetime value, which is part of your question, these highly engaged units tend to be with us for six plus years. And so, if you run those economics out over time, a small upfront customer acquisition cost makes a lot of sense and definitely can generate a positive ROI over time. So we’re comfortable with it. We think it’s the right structure. Now that we’ve scaled up and grown our platform business, we can deploy this and the numbers work for us.

Nick Zangler: Understood. Thanks for that. And then you mentioned your willingness to explore partnerships with other TV OEMs and the possibility of licensing that the SmartCast OS to, I guess, competing TV OEMs in the marketplace. You guys have always been so adamant about the unique combination of VIZIO hardware and VIZIO software. This obviously seems to represent a strategic shift. So question is, what has changed and why now?

William Wang: Yes, Nick. This is William. I’ll take that question. I’ll continue to be a firm believer in the integrated experience. And consumers continue to show their presence in a great all-in-one smart TV. You can see that through the decline of dongles on several players. In my view, the best way to provide an exceptional user experience is to prioritize equal importance on the hardware and software and make them work together seamlessly to give consumers the best possible experience. As you know, over the past several years, we’re having investing heavily in your platform and our people to deliver great products, great user experience. But as importantly, it creates a highly monetized and more flexible operating system to broadcast.

When most people think about a TV operating system, they also only think about how you support streaming apps like Disney Plus or Netflix. But so much more than that, especially when it was designed for integration with hardware in mind. Our software not only supports great streaming experiences, but actually works directly with the hardware to make the hardware itself perform even better. One way this is done is to pay for quality enhancement. So internal own software capability will be able to work with the best audience in the world and the best component manufacturers in the world to push the boundaries of the final product. This means better contrast ratio, better black level, better color accuracy, better audio just to name a few. As the race, we all know to control the living room heats up.

We see a great opportunity emerging in the market where certain highly value-added OEMs are looking for a deeper partnership than simply a build-on or render-OS sort of initiative. They want a partner that has resource or the know-how to help their product perform better and deliver an improved experience. And they want a partner who can help them build better product by not just giving out quality and race to the bottom line price, which in long-term we all know is unsustainable. Most importantly, we believe we can create mutually beneficial partnerships, which we believe is not available in the market today. So as I mentioned earlier, we’re already in early discussions and this will take some time to come together, but we’re very optimistic of the potential this can bring to leverage the investment.

We have already made to expand our platform penetration and footer skill, our advertising business.

Nick Zangler: Great. Thanks so much guys. Appreciate it and good luck going forward.

William Wang: Thank you Nick.

Michael Marks: Operator, we will take the next question.

Operator: We will take our next question from Laura Martin with Needham. Please proceed.

Laura Martin: Hi there. I have two. One is I’m really intrigued by the last bullet point of your press release that says you’re the exclusive CTV partner of Intuit SMB Media Lab, which unlocks new TAM of B2B budgets and a new wave of retail media network partnerships for VIZIO. I would really like to learn more about that. And then Adam, for you, this EBITDA, you weigh over delivered, you double the EBITDA number versus our estimates in the quarter, you just announced the third quarter, so up 60% year-over-year. But your guidance for the fourth quarter has the EBITDA down, the high end, down 20% year over year. So was there something unique that won’t be recurring in Q4? Are you guys going to take a bath on the TV device pricing, which is going to wipe out the EBITDA and make it be lower in Q4? What’s going on between these, the 60% growth in EBITDA on Q3 versus EBITDA down year-over-year in Q4 guidance? Thank you.