VIZIO Holding Corp.

Good afternoon, and welcome to Vizio's Q3 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 Donald, 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 investor section of our website. Note that our 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.

Thank you, Michael, and hello, everyone. Thank you for joining us today. Our third quarter results demonstrate 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 continued outperformance in advertising revenue in the connected TV space. I remain exceptionally proud of our seasoned team that continues to execute well. Despite some market uncertainty, Zizio delivered another strong quarter with 27% growth in advertising revenue. Our 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 Visio 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 expanding our 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 tech, and sales. Sylvia has made tremendous progress in driving monetization. Over the past few years, we have learned much about user engagement and behavior trends, which informs about TV lifetime value. Growth in engagement drives Smart Cash, 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 DeFi 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 measures, such as streaming hours and lower turn with our larger TVs, which together drives higher output. We believe that building a higher quality install base and investing in the right skills rather than 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 that drives 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 grow 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 an impressive $499 and 75-inch for $699. For that value, consumers can experience exceptional picture quality and premium gaming features. can also elevate the personal entertainment experience with one of Vizio's premium soundbars. Reviewers recently rate that consumers will be hard-pressed to find another Atmos-enabled soundbar for under $500. And, of course, this new TV collection comes with fast entertainment experiences right out of the 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 Watch Free Plus. Within Watch Free Plus, we offer users over 290 free ad-supported streaming channels and over 15,000 on-demand titles spanning a wide range of genres. So, as we look towards the future, we are excited about new growth drivers and the opportunity we see ahead for continued growth. WebVisio 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 the 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.

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 Plus revenue, which grew 22% on continued strength in advertising. Again, benefiting from the rapid growth in our high margin Platform Plus 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 Plus 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 Plus. For the quarter, Platform Plus 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 Plus 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 spend 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, a proxy for streaming time, grew 21% to 5.2 billion hours compared to a 10% increase in total Vizio hours. On a per active 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 Plus 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 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 and a quarter, with our average unit price down 8% as well. compared to a 12% decline in the overall TV industry. In audio, soundbar shipments rose 19% versus the year-ago 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 soundbar category to 19.3% from 16.7% a year ago. And finally, Our balance sheet remains 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 plus revenue to come in between $162 and $167 million, representing 20% growth at the midpoint. We expect Platform Plus 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 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?