VIZIO Holding Corp.

Good afternoon, everyone, and thank you for joining us for our third 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 Donnell, our Chief Revenue Officer for Platform Plus. Please note that in addition to our earnings release, a slide presentation for you to follow along with our remarks can be found on our investor relations website at investors.visio.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 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. During the call, we also refer to non-GAAP financial measures, including adjusted EBITDA. Reconciliations with the most comparable GAAP measures for non-GAAP financial information discussed on this call can be found in our earnings release or on the investor 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. I'm proud of the strength of our third quarter results. As the investment we have made in our Platform Plus business continues to bear fruit, Vizio is defining the future of the smart TV industry. Because our dual revenue model delivers the entire entertainment experience from the hardware and the software to the content and the ads, we're able to deliver an attractive value proposition to consumers, advertisers, and content planners alike. I'd like to highlight a few key points. And then Adam will get more detail on our Q3 results later in this call. Smart TVs have gotten smarter, and people are additional dongle because they no longer need to purchase another stick or box to watch their favorite entertainment. Multiple devices and remote controls are horrible consumer experience, which is why we created a simple, easy-to-use, single-design experience found in our Brazil smart TVs. As consumers increasingly favor the simplified experience, other companies have also begun to enter the smart TV space as they recognize the value of our business model. At Vizio, we are always looking forward and staying aware of our competition, older or new, big or small. We have been investing successfully in the TV and streaming business for many years and will continue to invest more and focus on what we do the best. offer innovation and exceptional consumer experience at an affordable price. On the device side of our business, we have worked extremely hard to replenish retail inventories ahead of the holiday season to continue to drive customer acquisition and grow market share. We have been hit by the same logistical and supply chain issues affecting all companies right now. But we have been working very closely with our long-term partners to help reduce delays and have strategically invest to expedite shipping. Although these higher freight and logistical costs have impacted our gross profit margin in the third quarter, this tactic has allowed us to mitigate supply chain disruption and be confident that our product will be on the store shelf as we head into Black Friday. We are aggressively working with our retail partners to stimulate sales by launching saving events even earlier this holiday season across our product lines, which means that there are amazing video deals out there for everyone with exceptional values on product like a 75-inch V-Series model in Walmart for under just $750. Now, that is one great holiday gift. We're also bringing the big screen experience to the home with incredible pricing and fast buy on both M and P series TVs and our number one selling sun bars. Our shelf shares matrix are still on track for the year. And we have also been able to grow to our space with key retailers, thanks to great products that continue to receive excellent reviews, such as our P series smart TVs, which earn Editor's Choice Award from Newsweek tag high, and reviewed. We have also just received a special recommendation from Rolling Stone Magazine for a Vizio 2.1 V-Series Sunbar, all of which are available for the holidays. We are creating Vizio products to be the center of the connected home, with SmartCast at the heart of all Vizio TVs. The seamless integration of hardware and software is key to a great consumer experience, which is always our number one priority. Our software engineers are constantly working to create new ways to make our customers' lives easier. This includes easy-to-use search and discovery functionality on our home page to help people find their favorite TV show and watch their favorite stars with building voice capabilities. Broadcast also gives people tons of apps and hundreds of free streaming channels available right out of the box, including HBO Max, FuboTV, BET+, PBS, and Funimation, which all launched this quarter. As we mentioned on our last call, we also upgraded our free streaming channel offering to Watch Free+. which brought an enhanced user interface and even more content to its popular destinations on Smartcast. And we're thrilled with the viewer feedback and engagement so far. Because of our rich, flat-level data, we know what people like to watch. And we're now able to curate a series of Visio-branded channels called Visio Features. In just three months, our first two channels full-time flight, and investigation have already become two of the top 10 most watched channels in Watch Free Plus. Visual features brings the audience a variety of exclusive channels that leverage our first-party viewing data and home screen targeting capability to deliver a more relevant entertainment experience. Additional recently launched visual feature channels include Gamer Nation with video game and e-sports programming, Mission, a channel for sci-fi fans, Fear with back-to-back horror movies, and Polaris, a new creator-driven channel that authentically shares hip-hop and black culture with the world. Curate the content from video features delivers more of the free content that people love and generate more engagement. Speaking of which, during the quarter, Oblisio's ad team continued to deliver exceptional results. As we announced previously, we closed out the 2022 upfront season with over $100 million in commitment from agency holding companies and brands, which was a four-fold increase over 2021. Our Q3 advertising growth was driven by an expanding client and category base as we continue to broaden our universe of direct advertising clients. Q3 advertising revenue was five times higher in key categories, including auto and CPG, in addition to media and entertainment. Not only that, but our advertising partners are spending more with us than ever before. Our average revenue for advertisers is more than twice what it was at this time last year. This accelerating advertising demand continues to be in line with broader market shifts. As consumers increasingly move from linear TV to streaming, brands are following them onto our platform. And as our audience engagement grows, our ACR TV streaming data also grows. This proprietary and comprehensive graph-level data is not only informing our own visual content programming and monetization strategy, it is also empowering the future of media measurement and currency itself. All the leading companies currently being considered as an alternative to traditional media measurements are powered by Visio Inkscape data, which put us in a unique position in the industry and significantly differentiates us our competitors. When you put all these things together, it is easy to see why Platform Plus is such a growth engine for us. Looking ahead, we're going to continue to increase customer acquisition and market share by leveraging our dual revenue business model, consistently developing and enhancing our business line of product to create greater consumer experience. and finding new ways to engage and monetize our virtual audience to grow our pool. All of the investments we've made in our products, our platform, and our people are paving the way for our continued evolution as a streaming-first, data-driven media company. I'm very proud of our virtual team for navigating this exciting and challenging time. I want to thank everyone for all their great work will continue to revolutionize the smart TV industry. And I am confident that we have the right strategy, the right mentality, and the right people to drive the future of television. With that, I will now turn the call over to Adam to speak to our third quarter results in more detail.

Thanks, William. In the third quarter, the growth in our Platform Plus business exceeded our expectations as we further ramped up our advertising execution across home screen inventory and our expanding base of video inventory, both on and off platform. We continued to invest in software and engineering resources to scale our platform operations and expand monetization opportunities. In our device business, we remained intensely focused on navigating through the supply chain and logistical complexities impacting so many companies. After inventories bottomed out in early July, we made strategic investments to help rebuild channel inventories as much as possible in advance of the holiday season. Of course, some of these actions had an impact on our device gross margins, but they were prudent steps designed to both help improve customer acquisition in the short term and to drive our growth strategy over the long term. Turning to the financials for the quarter, total company revenue grew 1% to $588 million, with Platform Plus revenue up 134% to $86 million, more than offsetting an 8% decline in revenue from our device business. The third quarter represents the fifth consecutive quarter of triple-digit revenue growth in Platform Plus, driven by advertising revenue, which grew 271% to $66 million. Both our home screen and video advertising revenue streams continue to grow and outperform, and we are excited to highlight that the third quarter saw record-breaking direct sold video advertising revenue. While certain advertiser categories are working through their own supply chain challenges, as a relatively new player in the market, we are expanding our advertiser client base and deepening their total spend with us as they seek our growing combination of owned and operated inventory and first-party data. For the quarter, advertising revenue represented 77% of total Platform Plus revenue. Non-advertising revenue grew 6%, driven by increased data licensing and content distribution fees. Device revenue continued to face difficult year-over-year comparisons to last year's pandemic-driven surge in demand, but Q3 Smart TV shipments grew 27% sequentially to $1.4 million, even in light of increased logistical constraints, and we expect Q4 to grow from there. Higher average unit prices for both TVs and soundbars during Q3 helped to somewhat offset the lower unit volumes. TV AUP was up 42%, while audio was up 8%. Total company gross profit was $83 million, with Platform Plus gross profit of $57 million, or about 69% of the total, and device gross profit of $26 million. Platform Plus gross profit grew 88% year-over-year, due to rapid growth in advertising revenue, which is increasingly becoming a mix of both on and off platform impressions. While we see tremendous headroom for continued growth on platform monetization, we are also gaining traction in off-platform advertising capabilities, which allows us to expand our market and tap into opportunities across the broader connected ecosystem. This broader capability offers strategic planning benefits to our advertising partners. Of course, these off-platform ad revenue sources won't carry the same margin profile that we achieve on-platform, but they expand our overall TAM and create advertising growth potential beyond our TV install base. During the quarter, Platform Plus gross profit margin was 67%. Device gross profit fell 56% as we were lapping last year's COVID-related surge in sales and working through the higher component and freight costs, as well as more promotion pricing versus the year-ago period. As we have been anticipating for several quarters, device gross profit margin came in at just over 5%, which is back in line with pre-pandemic averages. Panel and component costs peaked in July and have come down significantly in recent months, while freight and container costs remain elevated. Total company adjusted EBITDA for the quarter was $23 million, in line with our previous expectations. As a reminder, adjusted EBITDA is only adjusted for share-based compensation expense, which remains elevated this year due to a one-year vesting for grants issued to certain executives in connection with our IPO earlier this year. The higher amortization expense from these grants will roll off beginning in February of next year, resulting in considerably lower run rate comp expense going forward. And finally, net income was a loss of $19 million, or $0.10 per share. In terms of our key metrics, our Q3 results highlight the growing success we are experiencing in driving overall monetization. ARPU growth this quarter accelerated to a record $19.89, up 91% over the year-ago period, primarily benefiting from our improved monetization of Watch Free+. In terms of our engagement measures, as we anticipated, both total time spent on device and time on smart caps returned to sequential growth after the dip we saw in Q2 as the country began to open back up. On a year-over-year basis, total Vizio hours grew 24% to $7.3 billion, and smart caps hours grew 16% to $3.6 billion. With our ever-expanding content lineup, which as of the third quarter now includes household name apps such as HBO Max and BET+, as well as more channels to our watch-free offering, we are seeing continued growth in streaming activity ahead. SmartCast monthly active accounts grew 35% over the year-ago period, ending the quarter at 14.4 million. While all growth is good, we do believe active account growth during the quarter was somewhat impacted by low channel inventory at the start of the quarter, followed by the previously mentioned freight-related delays, which pushed shipments out towards the end of the quarter. For example, 40% of the 1.4 million units shipped during the quarter were shipped in September, leaving less time than usual for units to get into stores, be purchased, and converted to new active accounts within the quarterly timeframe. Now let me turn to what we expect for the fourth quarter. Starting with Platform Plus, our monetization initiatives are paying off and we are continuing to expand our reach and identify new opportunities. Our expanded relationships with media networks and ad agencies following this year's upfront process are driving growth and creating inventory scarcity in Q4 across both video and home screen. This will continue to be favorable for pricing and sellout levels. We are seeing increased demand for data licensing, which is contributing growth to our non-advertising revenue, and also strong competition for our remote control button sponsorships, which is driving increased pricing power. Based on the current trends, we expect Q4 Platform Plus revenue in the range of $100 to $110 million. We expect Platform Plus gross profit in the range of $65 to $70 million, implying a mid-60% gross margin for the quarter at the midpoint of the range. For device, we expect to see sequential growth in TV and soundbar unit shipments as we continue to replenish channel inventories and benefit from the holiday season. In terms of our device gross margins, given our increased confidence in our ability to grow our platform business, we see a strategic opportunity to trade lower device margins to support greater retail shelf share, to acquire active accounts, and to accelerate the growth drivers of our Platform Plus business. We would anticipate low single-digit gross profit margin over the coming quarters in order to feed our wide array of platform monetization, all leading to significantly higher ARPU over time. Lastly, we expect total company-adjusted EBITDAs to be in the range of $7 million to $12 million. So overall, 2021 has been a transformative year for Vizio, and we are very excited about the opportunities we see ahead. With that, let's open up the call to questions. Operator?