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.

Michael O’Donnell: Yes, I’ll start. Thanks, Laura. It’s Mike. I think we shared a little bit about this last quarter, but Intuit is launching a small business-focused retail media network. It’s called SMB Media Labs. This allows advertisers to target customers of QuickBooks across kind of various media properties. VIZIO is the exclusive connected TV partner of that, right? It’s really valuable data for us to reach small businesses. We can augment kind of our best-in-class TV data with Intuit’s high-fidelity data sets. This should continue to help us expand our partnerships in Telco, in travel, as well as newer categories, essentially like Fintech and workplace services. I think also partnering with Intuit helps put us into retail marketing discussions, as you know, is a rapidly growing portion of the ad market. We’re pretty excited to be the exclusive partner with them.

Adam Townsend: Laura, it’s Adam. On the EBITDA side, there are a couple things in the quarter to think about for this quarter. I mean, we have some glad that we over-delivered, and it came in certainly ahead of our expectations, which is a good thing. To your question about non-recurring, I did comment about the benefit from capitalized software development costs. That was something that came up during the quarter. It was about $3 million of benefit to the quarter, and that will not repeat sort of going forward. That’s one consideration. For the quarter in general, we’re really pleased with the advertising strength, and particularly the strength on the home screen. We were bracing what challenges the media entertainment space.

We guided pretty conservatively, making sure that we would capture the fact that those strikes were still underway. And while some of those were resolved, there’s still a lot of hesitation in the market. The actor strike could still be going on until just this week. And we were really pleased with the demand that still came in. And so that comes at a high. That consider a much higher margin. That helped bolster, if you look at the Platform+ margin particularly, you see a higher than we would have normally thought or higher within our guidance range expectation there. For Q4, now Q4 is definitely, it’s a higher promotion type of period. It is the holiday season, right? We’ve got a number of very attractive pricing out in the market to be competitive during this seasonally strong period for consumers.

So that’s part of it. That’s what’s in our expectation around the guidance, so that’s why you see it on a down basis, because it is a higher promotion period. We will be leaning into that. It’s a great time to be driving growth and active accounts around the holidays and the usual consumer demand that picks up at that time. So we try to factor all that in.

Laura Martin: Thanks very much.

William Wang: Thanks.

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

Operator: We will take our next question from Ben Swinburne with Morgan Stanley. Please proceed.

Ben Swinburne: Hey, good afternoon. Two questions. One, any help thinking about how the upfront went and how that might be impacting the fourth quarter advertising outlook into next year? And then secondly, I think, Adam, you mentioned you guys are targeting larger screen formats going forward given the higher engagement. I think I heard that right. If that’s true, what are the sort of financial implications of that in terms of either investment levels or your relationship with retailers and shelf space, the competitive dynamics at that higher end, anything you can share to help us think about what that means would be helpful? Thank you.

Michael O’Donnell: Yes, Mike, I’ll take the upfront question. I think then, as you know, upfront have been kind of slow for everyone. But from our standpoint, we’re up year-over-year already today in terms of commitments. I think we’ve seen increased commitments in categories like CPG, QSR, Pharma. And while I would say some of the larger upfront market has slowed this year, that’s kind of put us in a much better position of strength. Thanks to our first party data solutions, especially in the scatter market. So while we are up year-over-year on the upfronts, we’re seeing the scatter market is really strong right now. We talked about having 66 net new advertisers this past quarter. A majority of those came through scatter.

So our goal is always to ensure we have kind of a healthy baseline of committed dollars coming out of the upfront cycle. And we can close healthy upfronts with major agencies and brand partners, and then still kind of grow our scatter dollars throughout over the course of the year, adding more of these net new brands to our platform. So our expectation is heading into next year is that we will grow the upfront and with that healthy baseline. And we expect to grow significantly as we improve even more and more in the scatter market.

Adam Townsend: Yes, Ben. And on the other question, we really like that larger screen size part of the market. I mean, our data supports the higher engagement and therefore the longer and better higher customer lifetime value of those units. There’s no doubt, as I mentioned, that if you look at our metrics, we’re starting to see already some of the improvement in the quality and engagement metrics by the outpacing growth in streaming. Larger units, which tend to be the main screen in the home, are going to significantly outperform in terms of time spent streaming, which gives us a better opportunity to serve more ads and monetize home screen engagement and drive overall ARPU. As I mentioned in the prepared remarks, our larger screens, which tend to be those main screens in the home, actually deliver an ARPU that’s 30% higher than the smaller units.

It’s obviously in the blended 3155 ARPU that we reported this quarter, but that subset or that cohort is certainly delivering much greater economic values. So we need to think about how we position. We’ve got great products in the market with great reviews around it. That helps drive consumer demand and interest. We work with our retailers very closely, those partnerships, to have attractive pricing and merchandising support. And so there is an element of leaning into that strategy that we know will drive much greater long-term value over time.

Ben Swinburne: Thank you.

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

Operator: We will take our next question from Michael Morris with Guggenheim. You may proceed.

Unidentified Analyst: Hi, this is Charlie [indiscernible] on for Mike Morris. Just wanted to – are you guys able to hear me?

Adam Townsend: Yes, go ahead, Charlie.

Unidentified Analyst: Great. Yes, thanks for having me here. I wanted to follow-up on the OEM partnerships and ask if you could provide any color on how you’re thinking about the licensing potential there. And just how are you positioning your offer, your pitch, to partners in order to compete with others like Google, Roku, and Amazon? And do you expect to share advertising economics with the OEMs?

Adam Townsend: Yes, look, it’s early. We’re really excited about some of these conversations that are already underway. And we’re working out details of what these arrangements will look like. But we really are confident and feel strongly based on the feedback we’re hearing that there’s a real demand for something different in the market. And we hope to be able to bring that to these partners. I view it also as really a TAM expanding opportunity for us. If you look at the U.S. TV market, a little over 40 million units a year, we’re at about 11%, 12% market share of that. So it’s a very large market outside of our own existing sort of our own product, market share, where there’s an opportunity to break into that and penetrate more and more.

The more we can expand our platform into the market, the more we can scale our advertising business, the more viewership we can take advantage of, we become a more important partner for advertisers, content partners, really across the board of benefits. So we’ll update as these things come together. But early indications, we’re really excited about the progress we’re already making in these early conversations.

Unidentified Analyst: Great. Thank you. And one follow-up, if I could, on engagement, you noted the strong growth in the SmartCast hours per account in the quarter. Can you speak to anything that drove this engagement lift? Any impact you would call out from the launches of the ESPN or NFL apps, and then what levers you have to drive further growth from here?

Michael O’Donnell: Yes, I’ll take this off. So one of the key factors, look, we continue to add more apps to the platform. I think we shared we added ESPN, we added NFL. We have a ton of great content partnerships that have helped drive more time spent in addition to the already great partnerships we have. But one of the key drivers this quarter was around the redesign we’ve implemented. So we, as you know, we redesigned our home screen towards the end of last quarter. It’s more immersive. It’s more interactive. It’s got a cleaner look and feel. And we’re really pleased with the results of the redesign, right? Reviewers were overwhelmingly positive. Consumers definitely are as well. And we know consumers are because they vote with their behavior.

And not only are streaming hours up, but we’ve also seen engagement rates on the home screen up over 60% this past quarter. So it’s been great for consumers. They’re spending more time. They’re engaging more with the home screen. They’re using it more for search and discovery. This is great for advertisers. Obviously, it helps drive more engagement into the apps that they’re promoting. It’s great for WatchFree+ because we invest a lot of home screen real estate and driving consumers into our own and operated app. And what is very important factor in it is it’s all been backwards compatible. So if you bought a VIZIO TV seven years ago, or you have one bought one yesterday, you have that same great redesign on the home screen to help drive more time spent and more engagement.

Adam Townsend: Yes, this is Adam. I want to add. What I like about it is we’re seeing real indication that it’s not just engagement for the sake of engagement, but it’s actually engagement in areas where we have an opportunity to monetize as well. If you look at the statistics we provided, the SmartCast hours for active account, you can calculate that was up 12%, but our ad revenue per average active account in the quarter was up 16%, so again, showing that we’re actually able to monetize that engagement and that will help, obviously drive our revenue and growth over time.

Unidentified Analyst: Great, thank you.

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

Operator: We will take our next question from Steven Cahall with Wells Fargo. Please proceed.

Unidentified Analyst: Hey guys, this is Omar for Steve. Just a quick question on TV licensing opportunity, do you envision finding partnerships in your current pricing range or is this an opportunity more attractive to you guys for device types on price ranges when you have a lower market share, especially at the upper end of the market?

Adam Townsend: Look, I think we’ve got to be competitive in price on everything we do. I mean, that is the market, right? We know we compete with house brands like On. We compete with TCL, Hisense, we compete all the way up the ladder. And so whatever we do has to be compelling offering for the consumer. It has to be competitive, it has to be thoughtful, and we’re looking for a partnership relationship which as we mentioned, can be mutually beneficial. So back to my comment about continuing to be thoughtful, competitive, but disciplined in our own products, and then having these partnerships be an opportunity to expand our TAM beyond that. That’s really sort of the great add-on to this that this can bring to us.

Unidentified Analyst: That’s very helpful. Maybe you’ve been on the competitive environment, just can you talk around what is it like out there from a pricing standpoint, especially across some of your close competitors?

Adam Townsend: Yes, look, we track it, as you can imagine, very, very closely across the board to understand where we’re positioned versus others. I would characterize the pricing dynamics as continuing to be very competitive, but not quite as extreme as we saw in Q1 and Q2. Some of the big outliers have moved back up closer to the averages on a given skew, and that helps a bit. I mean, it certainly takes out some of those very, very extreme dynamics where you saw maybe one, maybe two, but really one particular brand gained a bunch of share in the first half of the year. That seems to have moderated a bit, and so we’re encouraged by that. But there’s no doubt we expect it to continue to be competitive into the holidays, and that’s why we’ve kind of factored in our position and our expectations around the holiday period, where there’s a lot of demand.

We want to make sure that we have a strong competitive pricing, but again, we’re going to continue to be disciplined about how we approach that.

Unidentified Analyst: Great, thanks for that.

Michael Marks: Thanks Omar. Operator, we’ll take the next question.

Operator: We’ll take our next question from Jason Kreyer with Craig-Hallum. You may proceed.

Jason Kreyer: Great, thank you. Adam, just a question on the device gross margins. I know with that turning negative this quarter and the focus on the bigger screen sizes, can you give any more color just on how aggressive you plan to get on those specific skews that you’re targeting kind of where margins could go there?

Adam Townsend: Look, we don’t guide the specific margins. Obviously, there’s really a lot of competitive detail information in that. We look at our pricing versus the market, where others are on a skew by skew basis and want to make sure that we are competitive, but again, avoid this sort of race to the bottom dynamic. I think we don’t think that some of those pricing strategies are sustainable in the market, and as a result, we don’t feel the need to chase them in the immediate term that can jeopardize further economics, and so we’re going to apply that kind of discipline around it. But clearly, if you’re supporting a 65-inch product with a higher average selling price versus they have 32, then there’s different dollars that you need to support, but my point is that the customer lifetime value of a 65-inch as an example is significantly higher than a 24 or a 32, and so for that reason, you’re willing to make that investment because at the ARPU level, we’re now generating, and the strong margins in our Platform+ business, it is a positive customer lifetime value in a significant way.

And so when there’s a race to gain households, as we’ve talked about, it’s competitive to be gaining and representing the operating system in a living room, we want to be really thoughtful about how we do that, and we like our strategy, we like this dual revenue structure that we’ve built. We’ve scaled up and grown our platform business to a level now that gives us that financial and strategic flexibility, and we’re going to be thoughtful about how we approach that in the overall market.

Jason Kreyer: That’s perfect. Thank you. Maybe one for Mike, just curious if you can talk about the trends you’ve seen in advertising recently, we’ve just heard a lot of commentary on a tougher star to Q4, it doesn’t seem like you’re really guiding to that, but if you’ve noticed any of that in the market?

Michael O’Donnell: Yes look speaking for VIZIO here, I mean we saw 27% growth in Q3, I think we’re projecting pretty strong growth again in Q4. In terms of trends, M&E, there’s still some uncertainty, but as you mentioned, wasn’t as bad as we were expecting, I think we’re well positioned there heading into Q4, and there could be more upside as things come to a close, and potentially new releases come out or more premiers come out into the market. But you look at those 66 new advertisers we had, I mean, we saw strong vertical growth, CPG, and QSR were all up over triple digits, pharma was up, insurance was up. I mean, we saw headwinds definitely in the automotive sector, but we were still up 60%, and we could have captured more dollars if there wasn’t for a separate strike of their own.

But by our ability to continue to add new advertisers, bring new partners into the fold, like automotive, we were able to get down into the tier two, tier three categories to help accelerate some of the advertising dollars. So we continue to feel strong about our position heading into Q4.

Jason Kreyer: Great, thank you.

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

Operator: We will take our next question from Cory Carpenter with JP Morgan. Please proceed.

Cory Carpenter: Thank you. Mike, I wanted to ask you about political and how big of an impact you think that could have in the work you’re doing to prepare for political advertising. And then maybe just a bigger picture question on SmartCast for Adam. $31 ARPU, you still have a gap that you’re closing with peers. Where do you feel like you’re still most undermined on SmartCast? Thank you.

Michael O’Donnell: Yes, thanks, Corey. We’re very optimistic about the 2024 political cycle. When you think about what political advertisers are looking for, they want targeted buys against local markets, and we’re positioned incredibly well. We have the ability to target audiences down to the most narrow geographic regions. We just added 35 more local channels to WatchFree+ recently to add more local content. We’ve got obviously unique data through in-scape viewing data as well as broad reach in key swing states. So we’re set up well to capture some of, I think, what people are projecting to be, I think $1.3 billion in CTV advertising this cycle. Last cycle, 2022, we learned a lot about how to improve sales. We did okay, not as good as we should have, but we learned from that.

We’ve added sales staff in DC to be closer to clients, and we’ve also kind of improved our programmatic partnerships and the capabilities we have there to capture additional demand. So overall, we’re very optimistic about our political revenue outlook for the back half of next year.

Adam Townsend: Yes, and on the ARPU question, I mean, obviously we’ve made tremendous progress, and we’re very proud of the team and the execution that’s got us to where we are, but we also believe there’s significant headroom from here. If you look at just the U.S. market, we think there’s a lot more room for growth versus this number that we’re putting up today. And so we got to continue to keep investing in a great overall experience for the consumer, more content, use our home screen to drive engagement, and ideally drive engagement into areas where, as we’ve said before, we have an opportunity to monetize. You want to deliver an exceptional user experience, but also have an opportunity to serve ads and monetize that time spent.

There’s no better place for us to achieve that than in WatchFree+. That’s why we continue to add more fast channels there. We’re adding more on-demand movie titles and television show titles. We’re expanding that capability to bring more to the consumer and a greater value proposition over all of them. As we can drive more time in monetizable content, more engagement means more ads serve, which means more revenue. Also, as we utilize our targeting tools and the data that we have, we can deliver exceptional campaigns for advertisers. We’re looking for specific ways to deploy campaigns and messages to consumers. So taking all of that together, again, we’re really excited about the upside that there remains to our ARPU number. VIZIO Account is an area where there’s an opportunity to your point about the gap.

We only rolled this out a year and a half ago, and we’re building out the partnerships that are available on VIZIO Account. That will help to drive subscriber revenue in that business. We’ve got about 40% of all the S.BOT and T.BOT apps that are now including that functionality. We’re going to be adding the NFL app later this quarter for subscriber revenue as well. So as we get the word out to our users that we’ve got this great way to manage their subscription services, to engage with VIZIO Account, and drive growth, we’re seeing great lift in premium apps like STARS [ph]. That’s a place where there’s still, to your question, a gap versus what you see in the existing marketplace today. So we’re going to continue to work to close that.

Cory Carpenter: Thank you.

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

Operator: We will take our next question from Tom Champion with Piper Sandler. Please proceed.

Tom Champion: Hi, good afternoon. William, I’m just curious, based on your experience and tenure in the industry, what inning of the price were on the device side you think we’re in, whether this cycle is following kind of a familiar template, what inning are we in? Could it extend well into next year? And would you expect the device segment to return to a positive gross profit contribution when all is said and done? I had a second question on VIZIO Account. Adam, you kind of just talked about it a little bit. Just wanted to see if there was any additional update there. Michael O’Donnell, I don’t know if you’d have anything to add. Thank you.

William Wang: Yes, sure. The TV market thing up and down for many years. And I think in the beginning, the years, definitely over supply of components that dropped down the price quite a bit. And that situation eased out quite a bit. And I think the component manufacturer, they are more careful with the pricing because the lower prices, the more they’re going to lose. They don’t want to do that anymore. Again, 12 months ago, there was a third class, the inventory. So maybe a lot of irrational pricing decisions, but now that’s kind of disappeared. But I think in the coming years, the price will be driven by not just components, inventory pressure, but I think that gone away. I think it’s really a competition between the CTV system where people are fighting for CTV market share. So that’s yet to — that’s been out there for years now. I think that will continue. But the component pressure on surplus inventory eased out quite a bit the past few months. Adam?

Adam Townsend: Yes, look on one for margins. Sure. I think over time, as this plays out, you could imagine that we would get margin back in to device. But again, to our earlier points and the value of our install base and the growing value as we execute against the significant upside we have for ARPU, just from a customer lifetime value standpoint, it continues to make sense to deploy the strategy that we’re working on right now. So we’re going to continue to be focused on that.

Michael O’Donnell: Yes, Tom, on your question on VIZIO account, not too much data points to add beyond Adam. So I think you shared 40% of the S.BOT, T.BOT base as integrated, over 200% increase in terms of subscriber growth over last year. But one of the things we’ve done is we just recently held our developer conference, this last quarter, and it’s critically important for us to continue to grow our relationships with the developers on our platform. And VIZIO account is one way we’re continuing to do that. We think it creates opportunities for them to drive more subscribers to get closer to our customer base. But we also leveraged it to help and we had over 200 attendees speak to them about other ways in which we can help them monetize, ways we can do that through advertising.

And then also some of the unique tools we have put in place around interactivity around our enhancements to our mobile platform, enhancements to our home screen, and which we can help them drive more innovation. So VIZIO account is one component that will help us continue to grow monetization. But I think it’s also an important component that helps us integrate more deeply with the app partners on our platform and show them that we have a lot of capabilities for today and for the future.

Tom Champion: Thank you guys.

Michael Marks: Thanks Tom. Operator, we have time for one more question.

Operator: We will take our final question from Tom Champion with Barrington. Please proceed. We’ll take our final question from Jim Goss from Barrington.

Jim Goss: All right. Thank you.

William Wang: Hi, Jim

Jim Goss: Hi. I was wondering first, the comment about the higher monetization of the larger sets. I was wondering if you could talk about the mix of drivers of that higher lifetime value. Was it the increased usage only or were there differences in the ad exposure and the monetization events that were taking place?

Adam Townsend: Look, I think it’s sort of both. It’s the way that they use the unit. If you could imagine, let’s just use a 65-inch again as an example. That’s going to be the main TV in the home. That’s really going to be watching most of their lean back, long form content. They’re going to be highly engaged with streaming services and engaging in a way that we have an opportunity to monetize that interaction. Not only in the home screen, but obviously across a variety of third party apps, and then hopefully they’re spending a growing amount of time in our WatchFree+ as we continue to build out and expand what that service offers. Contrasting that to a smaller unit where maybe over time it becomes a TV in the bedroom. It’s not used as frequently.

Maybe it’s a monitor. A lot of different use cases can span across the various sizes. As we understand that data more and more, and we understand the lifetime value, we understand how long a particular TV stays active in our fleet. It really helps drive and inform us around decisions on pricing, on retail relationships, because ultimately it’s really about having an opportunity to expand monetization.

Jim Goss: Do you get a combined effect if you have multiple VIZIO TV households? Or do you treat them separately?

Adam Townsend: It’s really a device metric. It all gets blended into our average reported statistics. So if a household has a 24-inch in one room and a 65-inch in the other room, and they use them differently, that will show up on a blended basis in our overall reporting statistics.

Jim Goss: Okay, and one other quick thing is the VIZIO branded content studio. You have one of your slides that addresses that. I wonder if you could talk about the potential importance of it to what you’re planning to do with that?

Michael O’Donnell: Yes, Jim. It’s Mike. I’ll take that. So from a home screen perspective, we’ve been looking at a lot of ways in which we can expand our advertiser base beyond media and entertainment. And I think we’ve done a really good job, whether that be with promotion of certain content we have within our platform, whether that be sponsorships of custom curated collections or channels, as well as branded content. It’s all ways in which we can bring a new fleet of advertisers into the home screen or monetize them beyond video or household connect. So, branded content studio has been a great addition for us to our advertising offering. Our TV data helps us understand what our consumers like to watch. So the branded content initiative helps us pair advertisers with content that’s produced for their tastes.

I think you see we just rolled out this past week our latest installment, it’s called Merry & Bright, a holiday decorating show brought with Jordan Sparks, and it’s brought to you by Home Depot. We think branded content studio is great because it gives our consumers exclusive original content. It’s great for the advertiser because our users are guaranteed to see the home screen when they turn the TV on. So it’ll provide great branding for them, as well as integrations directly into the content itself. With Home Depot, not only are they integrated into content, but we also have QR codes. So we’re able to create a shoppable experience as well. And then when you tie it all together from an economic standpoint, all the investment that we’re making in this original content is covered by the partnerships.

So we think it’s a great way to continue to grow our relationships with non-median entertainment partners integrated into the home screen.

Jim Goss: Okay, thanks much.

William Wang: Thanks Jim.

Michael O’Donnell: Thanks Jim. And thanks everyone for joining. This concludes today’s call. Have a great evening.