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Tivo Inc (NASDAQ:TIVO)
Q3 2019 Earnings Call
Nov 7, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon. My name is Stephanie, and I will be your conference operator today. At this time, I would like to welcome everyone to the TiVo Corporation 2019 Third Quarter Results Conference Call. [Operator Instructions]

I would now like to turn the call over to Nicole Noutsios, TiVo's Investor Relations. Please go ahead.

Nicole Noutsios -- Investor Relations

I'm Nicole Noutsios, Investor Relations at TiVo. With me today are Dave Shull, CEO; and Peter Halt, CFO. We just distributed a press release and filed an 8-K detailing our third quarter 2019 financial results. In addition, we posted a downloadable model on our IR site, showing historical financial results and GAAP to non-GAAP reconciliations. We are also webcasting this call and along with the audio, we are webcasting slides that we will reference during portions of today's call. After this call, you will be able to access a recording of this call on our website at tivo.com, as well as the transcript of the company's prepared remarks.

Our discussion includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to, among other things, TiVo's future Product business, operating results and strategies to drive long-term profitable growth, our future Product offerings and deployments and market acceptance of these offerings, the future growth, business opportunities and operating results of each of our Product and IP businesses, the success of the company's plans to separate the Product and IP Licensing businesses into two independent companies, and the realization of stockholder value resulting from separation and the tax-free nature, structure and anticipated timing of the separation.

We caution you not to put undue reliance on these forward-looking statements, as they involve risks and uncertainties that may cause actual results to vary materially from these forward-looking statements, as described in our Risk Factors in our reports filed with the SEC. Any forward-looking statements made on this call reflect our analysis as of today and we have no plans or duty to update them except as required by law.

With that, I will now turn the call over to our CEO, Dave Shull.

David Shull -- President and Chief Executive Officer

Thank you for joining us for the third quarter 2019 earnings call. We are very focused on company execution. This quarter we delivered solid financial results in the quarter, while accomplishing key business milestones. We streamlined our business operations and improved non-GAAP opex and adjusted EBITDA year-over-year. Also for the second consecutive quarter under my leadership, we are increasing our fiscal 2019 expectations for Adjusted EBITDA. In addition to the financial results, we continue to make progress on our separation process and also successfully launched TiVo+ last month. I will discuss all of these in further detail later in the call.

On the Product side of the business, we are extremely proud of our track record of innovation, and we're going to bring that track record forward into this new chapter for TiVo. TiVo is well positioned to capture a significant market opportunity. The streaming wars have given rise to numerous direct-to-consumer and over-the-top offerings, with new names popping up seemingly every day. The proliferation of video apps is overwhelming for consumers. So TiVo is committed to bringing all entertainment together in one place, making it easy to find, watch and enjoy your favorite shows. Only TiVo can cut through all the clutter by providing a neutral, fully integrated platform for consumers to find and watch all of their favorite shows, regardless of the content provider.

To deliver on this mission, we need to execute rigorously. The first step is to expand the entertainment options on the TiVo platform. There is an opportunity to expand the base of consumers using the TiVo experience, and then to generate income from their engagement with real-time/live TV, subscription video on demand services, and the emerging digital entertainment channels and shows.

Last month, we took the first Product step toward this vision by launching TiVo+. TiVo+ delivers live streaming channels and thousands, thousands of movies and TV shows to viewers in an app-free environment, making them easy to find, watch, and enjoy. TiVo+ provides access to internet-based content for TiVo customers, translating into opportunities for advertisers to reach highly engaged television audiences. TiVo+ will continue to roll out to more of our customers over the next several weeks and will continue to add more premium content from well-known publishers in the coming months and on an ongoing basis.

As we look to the future, we'll be rolling out more innovative products and services in the coming months, with the ultimate goal of more than doubling the existing households of over 21 million that we already proudly serve. If successful, this strategy has the potential to drive significant product revenue for TiVo. We also expanded our Android TV-based IPTV version of the TiVo user experience platform. We now have seven North American operators who will deploy this solution, including to their broadband-only households, that's up from five last quarter, and we continue to expand internationally.

In the quarter, Liberty Latin America selected TiVo to bring cutting-edge innovations to its video customers in Puerto Rico, and they plan to launch the TiVo platform in other markets across Latin America as well. At the core of our promise to consumers that we will make it easier to find, watch, and enjoy content is TiVo's Personalized Content Discovery, powered by TiVo's natural language voice solution. We believe that the machine learning technology underlying this solution is unique. TiVo provides a solution that incorporates both real-time/live linear programming, as well as subscription video on demand services, such as Netflix, Hulu, Prime and all of the emerging digital entertainment channels.

This quarter, Vodafone further endorsed our solutions by agreeing to deploy TiVo's content discovery solution as part of the new Vodafone TV service in Portugal, which is the first country to deploy its new "Intelligent Voice Search" feature that utilizes TiVo's natural language voice solution. In addition, Altice USA adopted TiVo's content discovery platform to power its subscriber entertainment platform. Our content discovery engine relies not only on sophisticated machine learning algorithms, but also on a knowledge graph that unites all of our entertainment metadata with real-time social media trends. TiVo generates monthly recurring revenue from subscribers using our content discovery solutions, so as our solutions are deployed it will add to our long-term contracted base.

On the cost side, it is critical that we right size our operating models, in order to best position both Product and IP Licensing businesses for long-term success. We made good progress in the quarter by reorganizing the Product business, in order to streamline operations and increase efficiencies. We expect an acceleration of the improved operating costs in Q4 and into next year. We also expect these improvements will streamline the Product business' operating costs and improve our stand-alone adjusted EBITDA. This will provide us the resources to reinvest in value-creating strategic initiatives. As you can see, we have made a lot of progress in our Product business and are focused on execution, right-sizing the business, and driving the necessary changes to enable us to deliver profitable growth.

Our IP Licensing Business continues to build on a strong, diverse base of customers and in Q3 reported 8% year-over-year revenue growth. We remain focused on expanding our customer base further into the social media and consumer electronics markets, while also expanding into new geographic territories. We are seeing significant demand for our IP portfolio in international markets. This quarter we licensed a number of over-the-top and IPTV video streaming providers.

We signed a new deal with D'Live to license OTT services in Korea. We have also renewed a multi-year license with Fetch TV, an Australian IPTV provider. Canada is an area of future expansion for us. As another step in expanding our customer base in Canada, we signed a new, multi-year license agreement with Canadian operator Eastlink. Additionally, I would like to provide an update on our ongoing Comcast litigation. TiVo is fully committed to protecting its intellectual property from unauthorized use and we are committed to our litigation strategy.

We expect Comcast will eventually pay a license for our innovations, just as its pay-TV peer companies do and as Comcast itself has done in the past. On that front, we are pursuing cases in the ITC and the District Court system and I would like to provide an update of where we are at in that process.

The Commission extended its time to issue its Final Determination in the second ITC case to December 16th. The third ITC case will be held from January 17th to the 21st, of 2020. The Administrative Law Judge's Initial Determination for the third ITC case is due by June 29th, 2020 and the Commission's Final Determination is due by October 29th, 2020.

We continue to believe that separating the IP Licensing and Product businesses is the best strategy to maximize shareholders' value in today's rapidly evolving market landscape. As stand-alone separate entities, unconstrained by each other, the two businesses will be better positioned to pursue growth opportunities. We have made good progress with the separation process. The company is actively interviewing candidates to fill out the management teams of both companies, standing up separate systems, and working with the IRS and the SEC to prepare for separation.

We are currently targeting completion of the transaction in April 2020, and will provide further updates in the coming months. TiVo's Board of Directors decided not to declare a cash dividend this quarter due to the impending separation of the businesses. As the company repays its remaining 2020 Convertible Notes by their maturity date, refinances the Term Loan B and separates the businesses, it is critical for TiVo to maintain cash for investment in TiVo's growth strategies going forward. This will assist us in optimizing the two balance sheets for the separation.

As we have stated previously throughout the separation process the Board of Directors will continue to be open to strategic transactions that could create additional stockholder value and, to that end, we continue to be engaged in discussions with interested parties. We made a lot of progress this quarter and I look forward to continuing our momentum in future quarters.

I will turn the call over to Peter to provide a financial overview of the quarter.

Peter Halt -- Chief Financial Officer

Thank you, Dave. As Dave just outlined, we had a strong quarter and continue to make improvements to streamline the business. As we improve our financials, we are tightening the range for our fiscal 2019 revenue expectations and increasing our Adjusted EBITDA expectations. I will discuss this in more detail later in the call.

Turning now to our current quarter results, on a consolidated basis, third quarter revenues were $158.5 million. GAAP total operating costs and expenses of $296.2 million were up $123.9 million, or 72% from a year ago, due to a $137.5 million non-cash goodwill impairment charge. Excluding this non-cash charge, total operating costs and expenses were down by $13.6 million, or 8% year-over-year, due to reduced compensation costs, as a result of our cost savings initiatives, and lower Amortization of intangible assets, partially offset by separation and transformation costs.

We are very focused on optimizing our business for our separation of the IP Licensing and Product businesses. In Q3, we made progress on right-sizing our cost structure for future success by taking actions that will create approximately $7 million in annualized savings. In October, we took additional actions, which will result in an additional $8 million in annual savings, for a combined annualized savings of $15 million.

Q3 GAAP operating costs also include $33.5 million of depreciation and amortization, $9.5 million of separation and transformation costs, $5.1 million in stock- based compensation and $2.2 million of other costs, primarily related to our ongoing cost savings initiatives, all of which are excluded from our calculation of adjusted EBITDA. GAAP operating losses in Q3 was $137.7 million and our GAAP loss from continuing operations before income taxes was $149.1 million.

Turning back to the non-cash goodwill impairment charge, $79.3 million of this charge related to our Product business and was due to the sustained decrease in our stock price and a reevaluation of our long-term plan for the Product business under our new executive leadership. This sustained decrease in our stock price also caused us to record a $58.2 million non-cash goodwill impairment charge related to our IP business. This impairment charge represents 5% of our IP business' goodwill.

In terms of our non-GAAP results, non-GAAP total COGS and opex was $108.5 million, down $9.2 million, or 8% year-over-year. This quarter's non-GAAP total COGS and opex benefited from our ongoing cost savings initiatives. Adjusted EBITDA in Q3 was $50.1 million, up $3.0 million, or 6%, year-over-year. Non-GAAP pre-tax Income was $36.8 million, up $3.9 million, or 12%, year-over-year. The improvement in adjusted EBITDA and non-GAAP pre-tax income were driven by our previously discussed cost savings initiatives.

For the third quarter, estimated cash taxes were $6.3 million. GAAP diluted weighted average shares outstanding were 126.1 million and non-GAAP diluted weighted average shares outstanding were 126.9 million. For those interested in calculating our non-GAAP EPS, take our non-GAAP pre-tax income, subtract our cash taxes, and divide by non-GAAP weighted average shares outstanding.

Turning to Q3 segment results, core Product revenues were $79.2 million, down 11% year-over-year. Q3 2018 offers a hard compare for this past quarter, as that quarter included a $3.3 million benefit from a passport contract renewal that included guaranteed minimums that were all recognized in the quarter.

There was also a reduction in revenues recognized in the current quarter of approximately $1.8 million related to adjusted reporting of subs from Latin American operators. We did not have a similar adjustment a year ago, nor do we anticipate a similar adjustment next quarter. Additionally, NRE and consumer subscription revenues contributed to the year-on-year decline. These revenue declines were partially offset by an increase in revenue from an international pay-tv operator exceeding its cumulative contractual minimums in 2019.

We exited Q3 with approximately $73 million in contracted quarterly Product run rate revenues. These are contracted revenues generally long-term for our core products. The decrease in contracted quarterly Product run rate revenues from Q2 was driven by the adjusted reporting of subs from Latin American operators previously mentioned, and a decrease in metadata revenue. Product adjusted operating expenses were $69.4 million in Q3, down 13% from last year. This was primarily attributable to our ongoing cost reduction efforts, as we reduced both compensation and contractor costs.

Moving on to the IP Licensing business, core IP Licensing revenues were $75.7 million, up 13% year-over-year, due to a $4.1 million increase in catch up payments and the strength in the business. As a reminder, the last of the TiVo Time Warp agreements expired in July 2018, and we've recognized $2.8 million of Time Warp revenues in Q3 last year. We exited Q3 with approximately $68 million in contracted quarterly IP Licensing run rate revenues, which excludes catch up revenues intended to make us whole for the pre-license period of use.

IP Licensing adjusted operating expenses of $25.7 million in Q3 were up 9% from last year. This is attributable to a $1.5 million impairment of a prepaid license and a $0.5 million increase in IP litigation costs, primarily due to the timing of ongoing litigation. We have a strong balance sheet with cash and investments at the end of the third quarter of $282 million. We expect to refinance our Term Loan B facility before year-end and to repay the remaining 2020 convertible notes by their maturity date.

We have been very focused on company execution and based upon our performance in Q3, we narrowed the range and are raising the low end of our revenue expectations. Our revenue expectations for the year are now $655 million to $665 million. This raises the midpoint of our revenue expectations to $660 million. Due to the non-cash impairment charge, we are now expecting our GAAP loss before taxes to be larger and in the range of $198 million to $203 million. Additionally, we are raising our expectations for adjusted EBITDA to a range of $190 million to $200 million and non-GAAP pre-tax income of $137 million to $145 million. We anticipate incurring $28 million to $29 million in cash taxes based on our operating expectations. Additionally, we expect GAAP diluted weighted average shares outstanding to be approximately 126 million and non-GAAP diluted weighted average shares outstanding to be approximately 127 million.

With that, I will now turn the call over to the operator to open the line for questions. Operator?

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Sterling Auty with J.P. Morgan.

Sahil Sharma -- J.P. Morgan -- Analyst

Hey, guys. This is Sahil on for Sterling. Thank you for taking my question. So what key steps were taken to split the company into the Product and IP businesses and what key steps are left?

David Shull -- President and Chief Executive Officer

We've done some work with the IRS and the SEC, we've also taken -- this is Dave, we've taken some substantial steps with regard to splitting the company. So we've clearly identified which employees are going to which organization post-split. We're in the process of evaluating complete management teams, for both companies post-split. And I expect that we'll resolve that in the next couple of weeks here and be ready to announce that as well. As I mentioned, we're targeting April 2020 to complete the final split of the companies. And so I expect that we'll be doing road shows with investors during Q1 as well.

Sahil Sharma -- J.P. Morgan -- Analyst

Thank you. And what renewals occurred in the quarter and what happened to the revenue run rate from that customer?

Peter Halt -- Chief Financial Officer

So for us in terms of revenue run rate, if you're asking about IPCo, our revenue run rate went up, but that's the result of new business. Our contracted core revenue went up from $66.5 million last quarter to $68 million. On the ProductCo side as I talked about in prepared remarks, it did go down a portion of that approximately $2 million of it related to some reporting adjustment that went back for a couple of years with some LatAm operators. We didn't have a similar event next quarter, nor do we expect when next quarter so you can expect to see that revenue return. And then as I mentioned in the prepared remarks, a little bit down on metadata in terms of contracted revenues where we've led a couple contracts with customers lapsed in territories, we no longer see a strategic view providing metadata.

Sahil Sharma -- J.P. Morgan -- Analyst

That's very helpful. Thank you.

Operator

Our next question comes from the line of Eric Wold with B. Riley.

Eric Wold -- B. Riley -- Analyst

Thank you. Good afternoon, guys. I guess first Peter, can you confirm the non-GAAP diluted EPS calculations from -- that you provided [Phonetic]. I get to $0.24 for Q3, and it looks like you took full year from a range of $80 to $85 to a range of $86 and $91?

Peter Halt -- Chief Financial Officer

Your calculation is correct, Eric.

Eric Wold -- B. Riley -- Analyst

All right, thank you. And then just trying to reconcile comments around the Product segments. Obviously, a lot going on with the Product division in terms of TiVo+ rolling out, Experience 4 getting acceptance there in roll-outs. A lot of the new kind of revenue-generating opportunities to come from that, it sounds like things are getting some momentum. And then part of the comment around the goodwill impairment charge was, a decrease in the long-term forecast for the Product business. I was trying to reconcile those two things?

David Shull -- President and Chief Executive Officer

Eric, this is Dave. Let me provide a little bit of context from my point of view. I mean, there's an obvious part of it which is the stock price is down, since the beginning of the year, so that drove a lot of the adjustment. But I came in and did a pretty thorough sort of review of the long range plans. And I want to make sure that what we put out there in front of the board, in front of the investors is very, very credible and very, very specific.

So we've taken some significant steps on the execution front. You've seen that on the cost side already come to the numbers a little bit, it's going to take a little bit longer for it to come through on the revenue side. But the first steps are there, which is to consolidate all of the Product team, all the engineering team in one place to remove all of the business group operations that we've had in place to operating separately and to say, we're one unified team on the Product side marching toward one strategy. That also really focuses our revenue goals for 2020 and beyond to say that we're very focused on the concept of bringing all this entertainment together. We're all about making it easier to find and watch and enjoy the content, that's driving a very specific set of Product development efforts and Product deployment efforts.

TiVo+ is a big first step for us, because this is not historically a content company. This is a company that's been designing hardware. So for us to shift and say we can actually deploy a bunch of content ads on that's the TiVo+ brand is a big step. But you're going to see really the next, what I would call sort of a coming out party early next year around CES and around the Q1 road show and I think at that point, there'll be a lot clearer kind of what we're looking at in terms of ramping up the deployment of the TiVo Experience space and where we see the future growth for the Product side coming.

Eric Wold -- B. Riley -- Analyst

Okay, and then -- thank you. And then on the cost reduction process, you laid out another $7 million that you -- a run rate becoming annualized within Q3 another $8 million in October, I guess if I look at the annual EBITDA guidance to be $190 million to $200 million. How much of the cost cuts you've taken so far are going to be in that number versus kind of what still to come all else being equal kind of heading into next year and kind of where else you think kind of beyond even those levels?

Peter Halt -- Chief Financial Officer

We'll have one full quarter for the actions taken in Q3, and you'll have a partial quarter about two-thirds of a quarter for the actions taken on October. So you'll see a much more meaningful benefit from the exact the $15 million in next year.

David Shull -- President and Chief Executive Officer

We'll definitely have more come in next year, we're not quite ready, Eric to lay out the details of what those going to look like. Again, I would say expect that early next year as we kind of hit the road with investors. But there's some timing issues with regard to standing of separate systems and making sure that we have full management teams on both sides stood up and once that's completed, I think you'll see even more aggressive changes on the cost side to make sure that we're competitive for both ProductCo and IPCo.

Eric Wold -- B. Riley -- Analyst

Okay. And then just final question, if I may, I guess you -- you're still engaged with interested parties. So essentially, it's still like now a dual path process as a spin or a sale. I mean, obviously this has been going on for interested parties for well over a year, I guess is there one or two items gating items going to keeping something from getting done? Is it complexity of structure? Is it evaluation? Anything you point to there, and then is there kind of a ultimate deadline you kind of get to and you pulled the IPCo and it's a split or there's some that kind of still there and can it linger past April?

Peter Halt -- Chief Financial Officer

I guess, I would say, we put the deadline of April out there, because we think that we're on a very good operating path to get there. And that is our default solution. That being said, of course, we're publicly traded, so if the right offer comes together, we'll do that deal and hopefully the investors are happy as well. I do believe that post-separation, there's a lot more latitude for creative conversations. I think the complexity of the split has made some of these conversations certainly slower and more complex than I would have hoped. And so I do think whether these companies are buyers or sellers post-split, I don't know. But I do think there's some very interesting combinations that should be happening in the industry on both the IP side and the Product side post-split here, if not before.

Eric Wold -- B. Riley -- Analyst

Thank you.

Operator

Your next question comes from the line of Hamed Khorsand with BWS Financial.

Hamed Khorsand -- BWS Financial -- Analyst

Hi. So the first question I had was in regards to TiVo Experience 4, do you have a set expectation to what percentage of the cable operators' customers switch over to TiVo Experience 4 in this next year?

David Shull -- President and Chief Executive Officer

Hamed, I don't think we have -- this is Dave, I don't think we have a real -- we don't have a specific number in mind. I would say, the Experience 4 feedback from the customers has been very good, but as you know, it takes time for them to roll out the capex to upgrade the boxes or whatever else may be required to kind of move from their prior system to Experience 4.

I'm probably more excited about the Android TV IPTV solution, I think it provides real cost advantages to them if you're looking at both their capex, the cable and the service, and the operators. So the fact that we went from five times MSOs to seven, I think is very strong endorsement of that, we're starting to see that roll-out in the market. And we'll keep you updated as we start to get some high volume numbers there as well. But we're excited about that and we're also very excited about the endorsement that we got from Liberty Latin America, indicating that this is not just a US potential, but there's real strong potential down in Latin America as well.

Hamed Khorsand -- BWS Financial -- Analyst

And then on the one past search the Product that you have. Is that going to get an a la carte approach? Are you trying to just bundle it all together into the TiVo Experience 4?

David Shull -- President and Chief Executive Officer

I'm a big fan, I guess of the integrated user experience. We certainly sell some of the content discovery capabilities as separate component so as you know to some of the biggest operators. But I think from a search point of view, I think the integration into the TiVo Experience is probably the best customer approach.

Hamed Khorsand -- BWS Financial -- Analyst

Okay. And then my last question is, any timing changes to revenue being recognized in Q3 versus Q4. I know Q3 was supposed to be a very weak quarter compared to Q2, but I was -- you guys beat the expectations now, but you're really bumping up with the full year numbers either.

Peter Halt -- Chief Financial Officer

Well we've raised the lower end of our guidance, which raised the midpoint as historically been the case. Q4 is often a forcing function with some of our customers for IP deals. So, we continue to expect that Q4 would be a better quarter than Q3 and that would be aligned with the best.

Hamed Khorsand -- BWS Financial -- Analyst

Okay, thank you very much.

Operator

Thank you. At this time, there are no further questions. I would like to turn the conference back over to Dave Shull, President and CEO for closing remarks.

David Shull -- President and Chief Executive Officer

Well, first of all, thank you all very much for your time today. I've had a chance to meet quite a few of you and look forward to doing that again in the coming months, whether it's at the Consumer Electronics Show in Vegas, or on our road show for the two companies here going forward. We're very, very focused on execution, whether that is optimizing the cost base, launching new products and so look forward to rebuilding the momentum here at TiVo and making sure that we deliver great results for our investors. Thank you all very much.

Operator

[Operator Closing Remarks]

Duration: 31 minutes

Call participants:

Nicole Noutsios -- Investor Relations

David Shull -- President and Chief Executive Officer

Peter Halt -- Chief Financial Officer

Sahil Sharma -- J.P. Morgan -- Analyst

Eric Wold -- B. Riley -- Analyst

Hamed Khorsand -- BWS Financial -- Analyst

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