VIZIO HOLDING CORP. The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors including those set forth in Part II, Item 1A "Risk Factors" and "Special Note Regarding Forward-Looking Statements" included elsewhere in this Quarterly Report on Form 10-Q. The following discussion of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes and other financial information included in this Quarterly Report on Form 10-Q and our audited financial statements and notes thereto included in our Annual Report on Form 10-K. Our historical results are not necessarily indicative of the results that may be expected for any period in the future.
As used in this Quarterly Report on Form 10-Q, unless the context otherwise requires, references to the following terms have the respective meaning as defined below:
Ad-supported Video on Demand (AVOD): Over-the-Top video services supported by serving ads. These include free platforms like YouTube TV, Pluto TV or our WatchFree+ as well as those, like Hulu, that charge a subscription fee in addition to serving ads.
Automatic Content Recognition (ACR): Technology that tracks viewing data on connected TVs. Advertisers and content providers use this data, among other things, to measure viewership reach and ad effectiveness.
Connected Home: Home electronics configuration in which appliances (such as an air conditioner or refrigerator) and devices (such as a home security system) can be controlled remotely using a mobile or other device connected to the internet.
Connected TV: A television that is connected to the internet through built-in capabilities (i.e., a Smart TV) or through another device such as a Blu-ray player, game console, or set-top box (e.g., Apple TV, Google Chromecast or Roku).
Dynamic Ad Insertion (DAI): Technology that seamlessly replaces TV ads with targeted ads from the Smart TV in real time, across multiple inputs.
Linear TV: Live, scheduled television programming distributed through cable, satellite or broadcast (antennae).
Multichannel Video Programming Distributor (MVPD): A service provider that delivers multiple television channels over cable, satellite, or wireline or wireless networks (e.g., Comcast's Xfinity cable TV and DISH satellite TV).
Over-the-Top (OTT): Any app or website that bypasses MVPD distribution and provides streaming video content directly to viewers, over the internet (e.g., Disney+, Hulu, Netflix and YouTube TV).
Premium Video on Demand (PVOD): Similar to TVOD, but lets consumers access premium on-demand content at a higher price point. Examples include feature films made available alongside, or in place of, a traditional movie theater release.
SmartCast: VIZIO's proprietary Smart TV operating system. The software platform where consumers can access VIZIO's WatchFree+ as well as a wide array of third-party OTT apps (e.g. Amazon Prime Video, Apple TV+, Disney+, Hulu, Netflix, Paramount+, Peacock and YouTube TV).
Smart TV: A television with built-in internet capability. Often includes an operating system.
Subscription Video on Demand (SVOD): OTT services that generate revenue through selling subscriptions to consumers (e.g., Disney+ and Netflix).
Transactional Video on Demand (TVOD): Distribution method by which consumers purchase video-on-demand content to own or on a rental basis (e.g., Amazon Prime Video rentals and Fandango Now).
Virtual Multichannel Video Programming Distributor (vMVPD): An MVPD that is delivered over the internet; interchangeable with "linear OTT" (e.g., Sling TV and YouTube TV).
WatchFree+: VIZIO's ad-supported OTT app. which offers access free of charge to
viewers on VIZIO Smart TVs, to news, sports, movies and general entertainment TV
shows on demand and in a format similar to linear TV through programmed
channels.
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--------------------------------------------------------------------------------Overview
Founded and headquartered inOrange County, California , our mission is to deliver immersive entertainment and compelling lifestyle enhancements that make our products the center of the connected home. We are driving the future of televisions through our integrated platform of cutting-edge Smart TVs and powerful operating system. We also offer a portfolio of innovative sound bars that deliver consumers an elevated audio experience. Our platform gives content providers more ways to distribute their content and advertisers more tools to connect with the right audience.
We currently offer:
•a broad range of high-performance Smart TVs that encompass a variety of price points, technologies, features and screen sizes, each designed to address specific consumer preferences;
•a portfolio of innovative sound bars that deliver immersive audio experiences; and
•a proprietary Smart TV operating system, SmartCast, which enhances the functionality and monetization opportunities of our devices.
Financial and operating results for the three months ended
•Net revenue of$408.9 million , up 2% •Platform+ net revenue of$110.8 million , up 69% •Gross profit of$73.9 million , compared to$79.5 million •Platform+ gross profit of$69.9 million , up 47% •Net income of$2.3 million , compared to net loss of$14.0 million •Adjusted EBITDA of$11.4 million , compared to$26.4 million •SmartCast Active Accounts of 16.1 million, up 15% •SmartCast Hours of 4.3 billion, up 22% •Average Revenue Per User (ARPU) of$25.87 , up 54%
Our Business Model
We generate revenue primarily from (1) selling our Smart TVs, sound bars and remote controls and (2) monetizing our digital platform. Currently, the majority of our total net revenue is generated from the sales of our devices, our Platform+ business, including our advertising services, is growing at a rapid pace. Given the growing number of use cases for Smart TVs, we expect to increase our revenue from connected TV advertising, SVOD services and other monetizable transactions made on our platform that extend beyond traditional entertainment content. Device
We offer a range of high-performance Smart TVs designed to address specific
consumer preferences, as well as a portfolio of sound bars that deliver
immersive audio experiences. We generate revenue from the shipment of these
devices to retailers and distributors across
Platform+
Platform+ is comprised of SmartCast, the digital platform that powers our Smart TVs, enabling a fully-integrated entertainment solution, and our ACR technology that collects and licenses viewing data.
Our award winning Smart TV operating system, SmartCast, delivers a vast amount of content and applications through an elegant and easy-to-use interface. SmartCast supports most leading streaming content apps such as Amazon Prime Video, Apple TV+, discovery+, Disney+, HBO Max, Hulu, Netflix, Paramount+, Peacock and YouTube TV, and hosts our ad-supported app, WatchFree+.
Our technology is able to identify the content displayed on the screen of our
Smart TVs, providing first-hand data, regardless of input source. We aggregate
this data to increase transparency and enhance targeting abilities for our
advertisers, while adhering to our strict consumer privacy policies. This
first-hand data allows us to monetize our own ad inventory and provides the
potential for a better user experience through more relevant advertisements. We
also license a portion of this data to advertising agencies, networks and ad
tech companies.
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--------------------------------------------------------------------------------We monetize these capabilities through:
Advertising
•Video advertising: Ad inventory on services such as WatchFree+, and certain third-party AVOD services. In exchange for distributing their content, we gain a portion of the advertising inventory to sell ourselves, or in some cases we sell all of the ad inventory and share a portion of the revenue with the content providers
•Home screen: Ad placements on our SmartCast home screen by streaming services, studios and other consumer brands
•Partner marketing: Branding opportunities through our large, in-store presence where our Smart TV cartons provide a highly-visible, physical space to showcase our partners' content images and streaming service logos
Data licensing
•Inscape: Fees from measurement services, ad tech firms, ad agencies and networks to license data generated from our Inscape technology to measure viewership trends and advertising performance
Content distribution, transactions and promotion
•Branded buttons on remote controls: Partners who want to place a button for their service on our VIZIO remote controls so that consumers can have quick access to their service
•SVOD and vMVPD: Revenue shared by SVOD and vMVPD services on new user subscriptions activated or reactivated through our platform
•PVOD and TVOD: Revenue shared by PVOD and TVOD services for purchases initiated on our platform
Additional monetization opportunities
As the Smart TV evolves to take on a more prominent role in the connected home, we believe new monetization opportunities will develop. For example, we expect:
•A growing user base will lead to higher advertising revenue, especially as our user base increasingly includes audiences no longer reachable through linear TV
•The vast amount of data obtained through our platform will improve the effectiveness of advertisement, generating higher returns for advertisers and potentially increasing ad rates for us
•That data will be used to create more personalized content recommendations and drive higher user engagement
•That interactive ads and improved subscription billing can increase the number of purchases made on our platform, including subscriptions, content rentals, ecommerce, food delivery and other micro transactions, for which we will receive a portion of the sales Overview of our supply chain We design our products in-house inCalifornia and we work closely with our Original Design Manufacturers (ODMs), panel suppliers and chipset suppliers for product design and technical specifications. Through this collaborative process, we leverage the manufacturing scale of these partners, as well as their research and development functions in the development of new product introductions. Our ODM partners provide shipping and logistics support to move finished products from their manufacturing facilities tothe United States . The title of the finished goods transfers from the ODM to us once we ship the product to a retailer. We believe that our asset-light business model fosters efficient operations with a low fixed-cost structure; coupled with careful management of marketing, selling, general and administrative expenses, which has enabled us to manage our working capital effectively and improve operating leverage. We believe that through these efficiencies, we are able to offer consumers high quality products at affordable prices. While the COVID-19 pandemic resulted in supply chain disruptions and delayed product availability, by the end of 2021 our inventory levels returned to more normal levels. For more information about the current effects of the COVID-19 pandemic, the conflict inUkraine and other macroeconomic and geopolitical events on our supply chain, see the section titled "Macroeconomic and Geopolitical Conditions" below.
Our sales and marketing approach
Retailers
We have maintained long-standing relationships with many leading retailers, including Amazon, Best Buy, Costco,Sam's Club , Target and Walmart. Our sales and marketing team works closely with these retailers to develop marketing and promotion plans, manage inventory, deploy go-to-market strategies, educate their salesforce and optimize the effectiveness of retail space for our devices. 19 --------------------------------------------------------------------------------
Consumers
Our marketing team is focused on building our brand reputation and awareness to drive consumer demand for our products. Our marketing approach is to emphasize value, which is to deliver quality products with leading technology at affordable prices, which enhance the entertainment experience. Our products and value proposition have earned numerous awards and accolades from popular press.
Advertisers
We offer an attractive value proposition for advertisers to reach consumers who are increasingly "cutting the cord." As we continue to build out our Platform+ advertising sales force, we intend to increase our presence and recognition among advertising agencies, advertisers and content providers through the television advertising ecosystem. In addition, we expect our audience size and data capabilities to continue to resonate with ad buyers looking to increase their connected TV ad spend.
Key Business Metrics
We review a number of operational and financial metrics, including the following key metrics, to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans and make strategic decisions.
Smart TV Shipments
We define Smart TV Shipments as the number of Smart TV units shipped to retailers or direct to consumers in a given period. Smart TV Shipments drive the majority of our net revenue currently and provide the foundation for increased adoption of our SmartCast operating system and the growth of our Platform+ net revenue. The growth rate between Smart TV units shipped and Device net revenue is not directly correlated because our Device net revenue can be impacted by other variables, such as the series and sizes of Smart TVs sold during the period, the introduction of new products as well as the number of sound bars shipped. For the three months endedJune 30, 2022 , our Smart TV Shipments totaled 1.1 million, a 5% year-over-year increase. We expect Smart TV Shipments will fluctuate from period to period in the future as consumer demand fluctuates.
SmartCast Active Accounts
We define SmartCast Active Accounts as the number of VIZIO Smart TVs where a user has activated the SmartCast operating system through an internet connection at least once in the past 30 days. We believe that the number of SmartCast Active Accounts is an important metric to measure the size of our engaged user base, the attractiveness and usability of our operating system, and subsequent monetization opportunities to increase our Platform+ net revenue. AtJune 30, 2022 , SmartCast Active Accounts were 16.1 million, representing a 15% year-over-year increase. This metric excludes approximately 3.9 million televisions connected to the internet through our legacy operating system, VIZIO V.I.A. Plus, which we no longer ship. As we continue to improve and market our SmartCast service combined with the secular shift to OTT, we expect the number of SmartCast Active Accounts will grow as our platform becomes the place where consumers access all of the features of their Smart TV rather than connecting a cable box, satellite or other external device, though we expect the rate of growth will decline over time.
Total VIZIO Hours
We define Total VIZIO Hours as the aggregate amount of time users spend utilizing our Smart TVs in any capacity. We believe this usage metric is critical to understanding our total potential monetization opportunities. Total VIZIO Hours for the quarter endedJune 30, 2022 , were 8.2 billion, representing an 14% year-over-year increase.
SmartCast Hours
We define SmartCast Hours as the aggregate amount of time viewers engage with our SmartCast platform to stream content or access other applications. This metric reflects the size of the audience engaged with our operating system as well as indicates the growth and awareness of our platform. It is also a measure of the success of our offerings in addressing increased user demand for OTT streaming. Greater user engagement translates into increased revenue opportunities as we earn a significant portion of our Platform+ net revenue through advertising, which is influenced by the amount of time users spend on our platform. SmartCast Hours for the three months endedJune 30, 2022 were 4.3 billion, representing a 22% year-over-year increase.
SmartCast ARPU
We define SmartCast ARPU as total Platform+ net revenue, less revenue
attributable to legacy VIZIO V.I.A. Plus units, during the preceding four
quarters divided by the average of (i) the number of SmartCast Active Accounts
at the end of the current period; and (ii) the number of SmartCast Active
Accounts at the end of the corresponding prior year period. SmartCast ARPU
indicates the level at which we are monetizing our SmartCast Active Account user
base. Growth in SmartCast ARPU is driven
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significantly by our ability to add users to our platform and our ability to
monetize those users. SmartCast ARPU at June 30, 2022 was $25.87 , representing a
54% year-over-year increase.
The following table presents a comparison of these key operational metrics for
the three months ended June 30, 2022 to the three months ended June 30, 2021 :
Three Months Ended
June 30,
2022 2021
(In millions, except ARPU)
Smart TV Shipments 1.1 1.1
SmartCast Active Accounts 16.1 14.0
Total VIZIO Hours 8,154 7,151
SmartCast Hours 4,281 3,505
SmartCast ARPU $ 25.87 $ 16.76
Non-GAAP Financial Measure
In addition to our results determined in accordance with
Adjusted EBITDA
We define Adjusted EBITDA as total net income (loss) before interest income, net, other expense, net, provision for (benefit from) income taxes, depreciation and amortization and share-based compensation. We consider Adjusted EBITDA to be an important metric to assess our operating performance and help us to manage our working capital needs. Utilizing Adjusted EBITDA, we can identify and evaluate trends in our business as well as provide investors with consistency and comparability to facilitate period-to-period comparisons of our business. We expect Adjusted EBITDA to fluctuate in absolute dollars and as a percentage of net revenue in the near term and increase in the long term as we scale our business and realize greater operating leverage. For the three months endedJune 30, 2022 , our net income increased to$2.3 from a net loss of$14.0 for the same period in the prior year, and Adjusted EBITDA decreased$15.0 million , or 57%, year-over-year. For the six months ended June, 30, 2022, net loss decreased 19% to$8.7 million compared to a net loss of$10.7 million for the same period in the prior year, and Adjusted EBITDA decreased$15.9 million or 76%, year-over-year. We use Adjusted EBITDA in conjunction with net income (loss) as part of our overall assessment of our operating performance and the management of our working capital needs. Our definition of Adjusted EBITDA may differ from the definition used by other companies and therefore comparability may be limited. In addition, other companies may not publish Adjusted EBITDA or similar metrics. Furthermore, Adjusted EBITDA has certain limitations in that it does not include the impact of certain expenses that are reflected in our condensed consolidated statement of operations that are necessary to run our business. Thus, Adjusted EBITDA should be considered in addition to, not as a substitute for, or in isolation from, measures prepared in accordance with GAAP, including net income (loss). We compensate for these limitations by providing a reconciliation of Adjusted EBITDA to net income (loss). We encourage investors and others to review our financial information in its entirety, not to rely on any single financial measure and to view Adjusted EBITDA in conjunction with net income (loss). 21 -------------------------------------------------------------------------------- The following table provides a reconciliation of net income (loss) to Adjusted EBITDA: Three Months Ended Six Months Ended June 30, June 30, 2022 2021 2022 2021 (Unaudited, in millions) Net income (loss)$ 2.3 $ (14.0) $ (8.7) $ (10.7) Adjusted to exclude the following: Interest income, net - (0.1) (0.1) (0.1) Other expense, net 0.8 - 0.8 0.1 Provision for (benefit from) income taxes 1.0 5.2 (0.9) 15.6 Depreciation and amortization 0.9 0.7 1.8 1.3 Share-based compensation 6.4 34.6 23.0 60.7 Adjusted EBITDA$ 11.4 $ 26.4 $ 15.9 $ 66.9
Macroeconomic and Geopolitical Conditions
We are subject to risks and uncertainties arising from macroeconomic and geopolitical conditions, including, but not limited to, effects of the COVID-19 pandemic and the conflict inUkraine , inflation, rising interest rates, foreign currency fluctuations, and lower consumer spending. In order to manage our cost structure in light of these conditions, we are seeking opportunities to reduce the growth of our expenses. We have slowed hiring in the second quarter of 2022, and we have reduced non-labor spend in areas such as travel and marketing. We continuously monitor the direct and indirect impacts of these macroeconomic and geopolitical events and trends on our business and financial results.
Impact on Device
During much of 2020 and early 2021, we experienced increased demand for our products due to the combined impact of stay-at-home orders and fiscal stimulus. As demand for televisions and home entertainment surged and supply chain and logistical partners operated at limited capacity, we encountered higher costs, reduced channel inventory levels at several retailers and delayed product availability. While we replenished most of our channel inventory by early 2022, macroeconomic effects arising from the COVID-19 pandemic and the conflict inUkraine (such as rising fuel prices, inflation, foreign currency fluctuations), new COVID-19 variants and lockdown measures implemented inChina in the first half of 2022, and geopolitical events inAsia have reignited global supply chain and logistics challenges and cost increases. If such conditions impact our suppliers, contract manufacturers, logistics providers and distributors, they could lead to increases in cost of materials, higher shipping and transportation rates, which could adversely affect our Device gross margin if we are unable to increase prices to offset costs due to price competition. To the extent we increase prices, such increases may not successfully offset cost increases, may adversely affect demand for our products, or may cause us to lose market share, adversely affecting our results of operations. In addition to creating renewed supply chain concerns, inflation, rising interest rates and related macroeconomic conditions have adversely affected consumer demand for our Smart TVs and sound bars, and a sustained economic downturn could further depress demand for our products and adversely affect Smart TV Shipments and Device gross margin. Impact on Platform+ Inflationary pressure, recessionary fears and reduced consumer confidence generally cause advertisers in a variety of industries to be cautious in their spending and to either pause or slow their campaigns. If such macroeconomic conditions cause advertisers to reduce or delay spending, the demand from advertisers for our Platform+ offerings may decline, which could lead to a decline in our Platform+ net revenue growth. In addition, as consumers increasingly pursue out-of-home activities and stay-at-home policies are lifted, growth in Total VIZIO Hours, SmartCast Hours and SmartCast Active Accounts has normalized to pre-pandemic levels. These factors have had, and may continue to adversely impact on our Platform+ net revenue. The extent of the ongoing impact of macroeconomic and geopolitical conditions on our business and on global economic activity is uncertain and may continue to adversely affect our business, operations and financial results. Our past results may not be indicative of our future performance. The risks related to our business are further described in the section titled "Risk Factors" in Part II, Item 1A of this Quarterly Report on Form 10-Q. 22 --------------------------------------------------------------------------------
Factors Affecting Performance Device Ability to sell more devices Selling more devices is integral to our strategy of growing SmartCast Active Accounts, increasing engagement, and expanding advertising monetization opportunities, all of which we believe will ultimately lead to higher SmartCast ARPU. There are a variety of factors that drive the sales of our devices, including our sales and marketing efforts, the quality of our products, new product introductions, effective supply chain management and relationships with retailers. For example: •We have introduced several new products that have had a favorable impact on our revenue and operating results, such as the introduction of our new line of Smart TVs and sound bars introduced in 2022. We expect that introducing products that both stimulate demand and resonate with consumers will drive our sales growth and expand our market share.
•We actively diversify our supply chain in order to mitigate potential risks.
•With respect to our relationships with retailers, our ability to anticipate and quickly respond to consumer preferences has influenced retailers' willingness to market and promote our products over those of our competitors. Historically, we have cultivated strong relationships with our retailers, including Amazon, Best Buy, Costco,Sam's Club , Target and Walmart.
Seasonality
Historically, we have experienced the highest levels of our sales in the fourth quarter of the calendar year, coinciding with the holiday shopping season inthe United States . Given the significant seasonality of our revenue, timely and effective product introductions and forecasting are critical to our operations, and fourth quarter sales are critical to our annual results.
Product mix
Our Device business encompasses a variety of Smart TVs and sound bars with different price points and features. Changes to our product mix may cause fluctuations in our gross profit as they reflect a range of margin profiles.
Platform+
Ability to grow SmartCast Active Accounts
The more SmartCast Active Accounts we have, the more attractive our SmartCast platform will be to third-party content providers and advertisers looking to reach this audience. Our ability to monetize our platform may suffer if we fail to secure popular apps and related content on SmartCast, which may lead users to purchase a television from a competitor.
Ability to increase engagement and monetize SmartCast Active Accounts
Our business is dependent on our continued ability to grow and sustain user engagement on SmartCast and, specifically, WatchFree+. User engagement on our platform is an essential revenue driver since it directly influences our attractiveness to advertisers, the largest near-term monetization opportunity. Therefore, our ability to attract compelling content viewers want to consume on WatchFree+ is critical to our monetization. Increasing engagement on our platform can result in greater attractiveness to advertisers and other monetization opportunities. The more time consumers spend on our platform, the more data we can collect, enabling us to create a more personalized and dynamic experience for users, while also allowing us to provide more targeted reach for advertisers.
Demand for a more connected home
The proliferation of the connected home ecosystem will power the long-term growth of our business. A Smart TV-centered connected home will drive user engagement and expand our monetization opportunities into new domains. In addition to boosting demand for our hardware products, a connected home will require new interactive features that we are well-positioned to help deliver, such as personal communications, commerce, gaming, fitness and wellness, and dynamic entertainment experiences. Coupled with our passion for innovation and technical expertise, we can offer differentiated experiences for consumers. As we believe our Smart TVs will evolve to have a more pivotal role in the connected home, we must continue to find ways to monetize the use cases enabled on our platform. --------------------------------------------------------------------------------
Other
Ability to continue to invest
The future performance of our business will be affected by our investments in both our Device and Platform+ businesses. We intend to continue to invest in the capabilities of our products and services to deliver better value for our consumers and partners and address new market opportunities.
Competition
We believe the principal competitive factors impacting the market for our devices are brand, price, features, quality, design, consumer service, time-to-market and availability. We believe that we compete favorably in these areas. The consumer electronics market in which we operate is highly competitive and includes large, well-established companies. Many of our competitors have greater financial, distribution, marketing and other resources, longer operating histories, better brand recognition and greater economies of scale. Our Platform+ business competes both to be the entertainment hub of consumers' homes and to attract advertising spend. We expect advertising spend to continue to shift from linear TV to connected TV, and as such we expect new competition to continue to intensify for viewership and for advertising spend. In this respect, we compete against other television brands with Smart TV offerings, connected devices and traditional cable operators seeking to integrate streaming media into their existing offerings. We also compete with OTT streaming services, as such services are able to monetize across a variety of devices and consumers may engage with their content through devices other than our Smart TVs. We compete with these devices and services in part on the basis of user experience and content availability, including the availability of free content. In addition, we compete to attract advertising spending on the basis of the size of our audience and our ability to effectively target advertising.
Components of Our Results of Operations and Financial Condition
Net revenue
Device net revenue
We generate Device net revenue primarily through sales of our Smart TVs and sound bars to retailers inthe United States , including wholesale clubs, as well as directly to consumers through our website. We recognize Device revenue when title of the goods is transferred to retailers or distributors, or upon the date the goods are delivered to consumers from a sale through our website. Our reported revenue is net of reserves for price protection, rebates, sales returns and other retailer allowances including some cooperative advertising arrangements. The prices charged for our Smart TVs and other devices are determined through negotiation with our retailers and are fixed or determinable upon shipment. Platform+ net revenue We generate Platform+ net revenue through sales of advertising and related services, data licensing, sales of branded buttons on our remote controls and content distribution. Our digital ad inventory consists of inventory on WatchFree+ and our home screen along with ad inventory we obtain through agreements with content providers and other third-party application agreements. We also re-sell video inventory that we purchase from content providers and directly sell third-party inventory on a revenue share.
Cost of goods sold
Device cost of goods sold
Device cost of goods sold primarily represents the prices for finished goods
that we negotiate and pay to manufacturers and logistics providers for Smart TVs
and other devices. The costs for finished goods paid to manufacturers include
raw materials, manufacturing, overhead and labor costs, third-party logistics
costs, shipping costs, customs and duties, license fees and royalties paid to
third parties, recycling fees, insurance and other costs. Device cost of goods
sold will vary with volume and is based on the cost of underlying product
components and negotiated prices with the manufacturers. Shipping costs
fluctuate with volume as well as with the method of shipping chosen in order to
meet consumer demand, inflation and geopolitical events. We expect these costs
to continue to fluctuate during the second half of 2022.
Device cost of goods sold may be partially offset by payments we receive under
certain manufacturer reimbursement and incentive arrangements in accordance with
product supply agreements. These arrangements can be conditioned on the purchase
of devices but are typically not a part of minimum purchase commitments with
manufacturers. Accordingly, we treat these arrangements and related payments as
reductions to the prices we pay to manufacturers for devices.
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--------------------------------------------------------------------------------Platform+ cost of goods sold
Platform+ cost of goods sold includes advertising inventory costs, including revenue share as well as targeting and measurement services, third-party cloud services, allocated engineering costs and other technology expenses, content or programming licensing fees, and amortization of internally developed technology.
Gross profit
We bifurcate gross profit by business activity due to the differing margin profiles of the Device and Platform+ businesses. In addition, we manage each business, from a financial reporting perspective separately down to the gross profit level. Though both our Device and Platform+ businesses are meaningful contributors to gross profit today, we expect Platform+ to exhibit significantly higher growth, and combined with its higher margins, drive the majority of gross profit growth in the future.
Device gross profit
We define Device gross profit as Device net revenue less Device cost of goods sold, and Device gross margin is Device gross profit expressed as a percentage of Device net revenue. Device gross profit is directly influenced by consumer demand, device offerings, and our ability to maintain a cost-efficient supply chain. Our Device gross profit may fluctuate from period to period as Device net revenue fluctuates and has been and will continue to be influenced by several factors including supplier prices, retailer margin and Device mix. We expect Device gross margin to fluctuate over time based on our ability to manage pricing through our supply chain and retailer network.
Platform+ gross profit
Our Platform+ gross profit represents Platform+ net revenue less Platform+ cost of goods sold, and Platform+ gross margin is Platform+ gross profit expressed as a percentage of Platform+ net revenue. As we continue to grow and scale our business, we expect Platform+ gross profit to increase over the long term. Our Platform+ gross profit has been and will continue to be affected by costs and availability of advertising inventory, costs of data services associated with delivering advertising campaigns, costs to acquire content from content providers and the timing of our third-party cloud services and other technology expenses, and we expect our Platform+ gross margins to fluctuate from period to period depending on the factors discussed above.
Operating expenses
We classify our operating expenses into four categories:
Selling, general and administrative
Selling, general and administrative expenses consist primarily of personnel costs for employees, including salaries, bonuses, benefits and share-based compensation, as well as consulting expenses, fees for professional services, facilities and information technology. We expect selling, general and administrative expenses to increase in absolute dollars as our business grows. We have and expect to continue to incur additional expenses as a result of costs associated with being a public company, including expenses related to compliance with the rules and regulations of theSEC and the listing standards of theNew York Stock Exchange , and increased expenses for insurance, investor relations, and fees for professional services. We expect selling, general and administrative expenses to fluctuate as a percentage of net revenue from period to period in the near term as we continue to invest in growing our business, but decline over the long term as we achieve greater scale over time.
Marketing
Marketing expenses consist primarily of advertising and marketing promotions of our brand and products, including media advertisement costs, merchandising and display costs, trade show and event costs, and sponsorship costs. We expect our marketing expense to increase in absolute dollars as we continue to promote our products and brand, particularly in the fourth quarter when we have historically experienced higher marketing expenses in connection with seasonally higher Device net revenue. We expect marketing expenses to fluctuate as a percentage of net revenue from period to period.
Research and development
Research and development expenses consist primarily of employee-related costs, including salaries and bonuses, share-based compensation expense, and employee benefits costs, third-party contractor costs, and related allocated overhead costs. In certain cases, costs are incurred to purchase materials and equipment for future use in research and development efforts. These costs are capitalized and expensed. We expect research and development expenses to continue to increase as we expand our Platform+ service.
Depreciation and amortization
Depreciation expenses cover declines in value of fixed assets such as buildings,
leasehold improvements, and equipment. Amortization expenses primarily relate to
declines in the value of our capitalized software costs.
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--------------------------------------------------------------------------------Non-operating (expense) income, net
Non-operating (expense) income, net consists of interest income, net including interest earned on our financial institution deposits and interest expense on our credit facility and other expense, net relating to activities not related to recurring operations.
Provision for (benefit from) income taxes
Our provision for (benefit from) income taxes consists of income taxes inthe United States and related state jurisdictions in which we do business. Our effective tax rate will generally approximate theU.S. statutory income tax rate plus the apportionment of state income taxes based on the portion of taxable income allocable to each state. We regularly assess the likelihood of adverse outcomes resulting from the examination of our tax returns by theU.S. Internal Revenue Service and other tax authorities to determine the adequacy of our income tax reserves and expense.
Should actual events or results differ from our current expectations, charges or credits to our provision for (benefit from) income taxes may become necessary.
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--------------------------------------------------------------------------------Results of Operations
The following table sets forth the components of our condensed consolidated statements of operations for each of the periods presented:
Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 2022 2021
(Unaudited, in millions except percentages)
Net revenue:
Device $ 298.1 $ 335.6 $ 680.9 $ 789.1
Platform+ 110.8 65.5 213.4 117.7
Total net revenue 408.9 401.1 894.3 906.8
Cost of goods sold:
Device 294.1 303.6 669.0 708.8
Platform+ 40.9 18.0 78.6 31.8
Total cost of goods sold 335.0 321.6 747.6 740.6
Gross profit:
Device 4.0 32.0 11.9 80.3
Platform+ 69.9 47.5 134.8 85.9
Total gross profit 73.9 79.5 146.7 166.2
Operating expenses:
Selling, general and administrative 50.3 70.4 112.7 128.5
Marketing 9.2 10.0 22.5 14.4
Research and development 9.4 7.3 18.6 17.1
Depreciation and amortization 0.9 0.7 1.8 1.3
Total operating expenses 69.8 88.4 155.6 161.3
Income (loss) from operations 4.1 (8.9) (8.9) 4.9
Interest income, net - 0.1 0.1 0.1
Other expense, net (0.8) - (0.8) (0.1)
Total non-operating (expense) income, net (0.8) 0.1 (0.7) -
Income (loss) before income taxes 3.3 (8.8) (9.6) 4.9
Provision for (benefit from) income taxes 1.0 5.2 (0.9) 15.6
Net income (loss) $ 2.3 $ (14.0) $ (8.7) $ (10.7)
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The following table sets forth the components of our condensed consolidated
statements of operations as a percent of total net revenues for each of the
periods presented:
Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 2022 2021
Net revenue:
Device 73 % 84 % 76 % 87 %
Platform+ 27 % 16 % 24 % 13 %
Total net revenue 100 % 100 % 100 % 100 %
Cost of goods sold:
Device 72 % 76 % 75 % 78 %
Platform+ 10 % 4 % 9 % 4 %
Total cost of goods sold 82 % 80 % 84 % 82 %
Gross profit:
Device 1 % 8 % 1 % 9 %
Platform+ 17 % 12 % 15 % 9 %
Total gross profit 18 % 20 % 16 % 18 %
Operating expenses:
Selling, general and administrative 12 % 18 % 13 % 14 %
Marketing 2 % 2 % 3 % 2 %
Research and development 2 % 2 % 2 % 2 %
Depreciation and amortization - % - % - % - %
Total operating expenses 17 % 22 % 17 % 18 %
Income (loss) from operations 1 % (2) % (1) % 1 %
Interest income, net - % - % - % - %
Other expense, net - % - % - % - %
Total non-operating (expense) income, net - % - % - % - %
Income (loss) before income taxes 1 % (2) % (1) % 1 %
Provision for (benefit from) income taxes - % 1 % - % 2 %
Net income (loss) 1 % (3) % (1) % (1) %
Comparison of the Three and Six Months Ended June 30, 2022 and June 30, 2021
Net revenue
Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 $ Change % Change 2022 2021 $ Change % Change
(Unaudited, in millions except percentages)
Net revenue:
Device $ 298.1 $ 335.6 $ (37.5) (11) %
110.8 65.5 45.3 69 % 213.4 117.7 95.7 81 %
Total net revenue $ 408.9 $ 401.1 $ 7.8 2 % $ 894.3 $ 906.8 $ (12.5) (1) %
Device net revenue
Device net revenue decreased $37.5 million , or 11%, for the three months ended
June 30, 2022 as compared to the same period in 2021. The decrease in Device net
revenue was primarily due to an 8% decrease in total Device average unit price
and a 4% decrease in total device units shipped. The decline in average unit
price was primarily driven by more competitive pricing for Smart TVs. The
decline in total device shipments was driven by lower sound bar shipments
partially offset by higher Smart TV Shipments.
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Device net revenue decreased $108.2 million , or 14%, for the six months ended
June 30, 2022 as compared to the same period in 2021. The decrease in Device net
revenue was primarily due to an 8% decrease in our total device average unit
price and a 6% decrease in total device units shipped. The decline in average
unit price was primarily driven by more competitive pricing for Smart TVs
partially offset by higher average unit price for sound bars. Shipments of both
Smart TVs and sound bars decreased compared to the same period in 2021.
Platform+ net revenue
Platform+ net revenue increased$45.3 million , or 69% for the three months endedJune 30, 2022 , as compared to the same period in 2021. The increase in Platform+ net revenue was primarily due to an increase in advertising revenue of$34.4 million , or 71%, from$47.4 million , and an increase in non-advertising revenue of$11.9 million , or 65% from$18.2 million primarily due to higher data licensing revenue. The increase in advertising revenue was driven in part by an increase in SmartCast Active Accounts. Platform+ net revenue increased$95.7 million , or 81% for the six months endedJune 30, 2022 , as compared to the same period in 2021. The increase in Platform+ net revenue was primarily due to an increase in advertising revenue of$74.1 million , or 90% from$82.5 million , and an increase in non-advertising revenue of$21.6 million , or 61% from$35.2 million primarily due to higher data licensing revenue. The increase in advertising revenue was driven in part by an increase in SmartCast Active Accounts.
Cost of goods sold, gross profit and gross margin
Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 $ Change % Change 2022 2021 $ Change % Change
(Unaudited, in millions except percentages)
Cost of goods sold:
Device $ 294.1 $ 303.6 $ (9.5) (3) % $ 669.0 $ 708.8 $ (39.8) (6) %
Platform+ 40.9 18.0 22.9 127 % 78.6 31.8 46.8 147 %
Total cost of goods sold $ 335.0 $ 321.6 $ 13.4 4 % $ 747.6 $ 740.6 $ 7.0 1 %
Gross profit:
Device $ 4.0 $ 32.0 $ (28.0) (88) % $ 11.9 $ 80.3 $ (68.4) (85) %
Platform+ 69.9 47.5 22.4 47 % 134.8 85.9 48.9 57 %
Total gross profit $ 73.9 $ 79.5 $ (5.6) (7) % $ 146.7 $ 166.2 $ (19.5) (12) %
Gross margin:
Device gross margin 1.3 % 9.6 % 1.7 % 10.2 %
Platform+ gross margin 63.1 % 72.5 % 63.2 % 73.0 %
Total gross margin 18.1 % 19.8 % 16.4 % 18.3 %
Device cost of goods sold, Device gross profit, and Device gross margin
Device cost of goods sold decreased$9.5 million , or 3%, for the three months endedJune 30, 2022 , as compared to the same period in 2021, primarily due to fewer sound bars shipments. Device gross margin decreased to 1.3% for the three months endedJune 30, 2022 , as compared to 9.6% in the same period in 2021, due to decreases in gross margins for both Smart TVs and sound bars. Device cost of goods sold decreased$39.8 million , or 6%, for the six months endedJune 30, 2022 , as compared to the same period in 2021, due to fewer Smart TV Shipments and sound bars shipments. Device gross margin decreased to 1.7% for the six months endedJune 30, 2022 , as compared to 10.2% in the same period in 2021, due to decreases in gross margins for both Smart TVs and sound bars.
Platform+ cost of goods sold, Platform+ gross profit, and Platform+ gross margin
Platform+ cost of goods sold increased$22.9 million , or 127%, for the three months endedJune 30, 2022 , as compared to the same period in 2021. The increase in Platform+ cost of goods sold was primarily due to increases in advertising inventory costs and third-party cloud services. Platform+ gross margin decreased to 63.1% for the three months endedJune 30, 2022 , as compared to 72.5% in the same period in 2021. 29 -------------------------------------------------------------------------------- Platform+ cost of goods sold increased$46.8 million , or 147%, for the six months endedJune 30, 2022 , as compared to the same period in 2021. The increase in Platform+ cost of goods sold was primarily due to increases in advertising inventory costs, and third-party cloud services. Platform+ gross margin decreased to 63.2% for the six months endedJune 30, 2022 , as compared to 73.0% in the same period in 2021. Operating expenses Three Months Ended Six Months Ended June 30, June 30, 2022 2021 $ Change % Change 2022 2021 $ Change % Change (Unaudited, in millions except percentages) Selling, general and administrative$ 50.3 $ 70.4 $ (20.1) (29) %$ 112.7 $ 128.5 $ (15.8) (12) % Marketing 9.2 10.0 (0.8) (8) % 22.5 14.4 8.1 56 % Research and development 9.4 7.3 2.1 29 % 18.6 17.1 1.5 9 % Depreciation and amortization 0.9 0.7 0.2 29 % 1.8 1.3 0.5 38 % Total operating expenses$ 69.8 $ 88.4 $ (18.6)
(21) %
(4) %
Selling, general and administrative
Selling, general and administrative expenses decreased$20.1 million , or 29% for the three months endedJune 30, 2022 , as compared to the same period in 2021. The decrease is primarily due to a$28.1 million decrease in share-based compensation expense. This decrease was partially offset by an increase in personnel costs due to growth in our Platform+ business. Selling, general and administrative expenses decreased$15.8 million , or 12% for the six months endedJune 30, 2022 , as compared to the same period in 2021. The decrease in selling, general and administrative expense was primarily due to lower share based compensation expense of$38.2 million , offset by increases in personnel costs as we grow our Platform+ business.
Marketing
Marketing expenses decreased$0.8 million , or 8% for the three months endedJune 30, 2022 , as compared to the same period in 2021, and increased$8.1 million , or 56% for the six months endedJune 30, 2022 , as compared to the same period in 2021, primarily due to higher merchandising and media costs.
Research and development
Research and development expenses increased
Depreciation and amortization
Depreciation and amortization expense increased$0.2 million , or 29% for the three months endedJune 30, 2022 as compared to the same period in 2021, and increased$0.5 million , or 38% for the six months endedJune 30, 2022 as compared to the same period in 2021 due to additional furniture, fixtures and equipment to accommodate the growth in our workforce.
Non-operating (expense) income
Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 $ Change % Change1 2022 2021 $ Change % Change1
(Unaudited, in millions except percentages)
Interest income, net $ - $ 0.1 $ (0.1) NM $ 0.1 $ 0.1 $ - NM
Other expense, net (0.8) - (0.8) NM (0.8) (0.1) (0.7)
NM
Total non-operating (expense) income, net$ (0.8) $ 0.1 $ (0.9) NM$ (0.7) $ -$ (0.7) NM _________________________ 1. NM, not meaningful Interest income, net for the three and six months ended 2022 was not material. Other expense, net was$(0.8) million and reflects an unrealized loss on equity investments due to a change in fair value. 30 --------------------------------------------------------------------------------
Provision for (benefit from) income taxes
Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 $ Change % Change 2022 2021 $ Change % Change
(Unaudited, in millions except percentages)
Provision for (benefit
from) income taxes $ 1.0 $ 5.2 $ (4.2) (81) % $ (0.9) $ 15.6 $ (16.5) (106) %
Effective tax rate 29 % (60) % 10 % 316 %
We recorded a tax provision of $1.0 million , resulting in an effective tax rate
of 29%, and $5.2 million , resulting in an effective tax rate of (60)%, for the
three months ended June 30, 2022 , and June 30, 2021 , respectively. We recorded a
tax benefit of $0.9 million , resulting in an effective tax rate of 10%, and a
tax provision of $15.6 million , resulting in an effective tax rate of 316%, for
the six months ended June 30, 2022 and June 30, 2021 , respectively. For the
three and six months ended June 30, 2022 , the effective tax rate differs from
the statutory tax rate of 21% primarily due to the approximately $0.3 million
and $3.4 million , respectively, in permanent book-to-tax difference for the
share-based compensation expense deduction limited on certain executive officers
as a publicly held corporation. The tax provision for the six months ended
June 30, 2022 includes a net income tax benefit of $2.3 million for discrete
items primarily due to excess tax benefits relating to stock-based compensation.
Backlog
We do not believe that our backlog of orders is meaningful as of any particular date or indicative of future sales, as our retailers can change or cancel orders with little or no penalty and limited advance notice prior to shipment.
Liquidity and Capital Resources
To date, our primary cash needs have been for working capital purposes and to a lesser extent, capital expenditures, acquisitions and cash dividends. We have historically funded our business through cash flows generated from operations, the issuance of common stock and our revolving credit facility, as described below. We have grown rapidly over the past two years. As we continue to grow our business and invest in the development of our Platform+ business, we may need higher levels of working capital. As ofJune 30, 2022 andDecember 31, 2021 , we had cash and cash equivalents of$335.8 million and$331.6 million , respectively. We believe our existing cash and cash equivalents and cash from operations will be sufficient to meet our projected operating requirements for at least the next 12 months from the date of this Quarterly Report on Form 10-Q. Our future capital requirements may vary materially from our current expectations and will depend on many factors, including the growth of our business, the timing and extent of spending on various business initiatives, including investment in our Platform+ offerings, the timing of new product introductions, market acceptance of our products and overall macroeconomic and geopolitical conditions, including the effects of the impact of the COVID-19 pandemic. To the extent that current and anticipated future sources of liquidity are insufficient to fund our future business activities and requirements, we may be required to seek additional equity or debt financing. In the event additional financing is required from outside sources, we may not be able to obtain such financing on terms acceptable to us or at all. To the extent that we issue equity or convertible debt securities in the future, there will be further dilution to our investors. Further, any debt financing obtained by us in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. We are party to a credit agreement withBank of America, N.A ., which currently provides for a revolving credit line of up to$50.0 million . Any indebtedness under this credit agreement is collateralized by substantially all of our assets and bears interest at a variable rate based either on LIBOR, the federal funds rate or the prime rate. The credit agreement contains customary affirmative and negative covenants and matures inApril 2024 . For the three and six months endedJune 30, 2022 , there were no borrowings from or amounts outstanding under this credit facility and we were in compliance with all debt covenants. 31 --------------------------------------------------------------------------------
The following table sets forth the major components of our condensed consolidated statements of cash flows data for the periods presented:
Six Months Ended
June 30,
2022 2021
(Unaudited, in millions)
Net cash provided by operating activities $ 19.3 $ 51.0
Net cash used in investing activities (11.6) (3.0)
Net cash (used in) provided by financing activities (3.5) 110.7
Effect of exchange rate changes on cash and cash equivalents - (1.0)
Net increase in cash and cash equivalents $
4.2
Cash flows from operating activities
Cash flows from operating activities consist of net income (loss) adjusted for certain non-cash items, including depreciation and amortization, share-based compensation expense, change in allowance for doubtful accounts, and other non-cash related items as well as the effect of changes in working capital and other activities. For the six months endedJune 30, 2022 , net cash provided by operating activities was$19.3 million , consisting of a net loss of$8.7 million adjusted for non-cash expenses of$28.2 million . Changes in operating assets and liabilities represented a$0.2 million use of cash, primarily driven by changes in working capital, including decreases in accounts receivable offset by increases in accounts payable and accrued expenses. For the six months endedJune 30, 2021 , net cash provided by operating activities was$51.0 million , consisting of net loss of$10.7 million adjusted for non-cash expenses of$63.8 million . Changes in operating assets and liabilities represented a$2.2 million use of cash, primarily driven by changes in working capital, including decrease in accounts receivable offset by an increase in other current assets, decreases in accounts payable due to related parties, accounts payable and accrued expenses. For the six months endedJune 30, 2020 , net cash used in operating activities was$8.3 million , consisting of net income of$26.6 million adjusted for non-cash expenses of$4.0 million . Changes in operating assets and liabilities represented a$38.9 million use of cash, primarily driven by changes in working capital, including a decrease in accounts payable and accounts payable due to related parties partially offset by a decrease in accounts receivable.
Cash flows from investing activities
For the six months endedJune 30, 2022 andJune 30, 2021 , our net cash used in investing activities was$11.6 million and$3.0 million , respectively, and was primarily due to the purchase of property and equipment to support our increased employee headcount and increased investments into internally developed software to support the overall growth in our business. We expect that we will make capital expenditures and investments in the future, primarily on leasehold improvements and internally developed software, potential build-out of our corporate offices, as well as additional IT infrastructure, all of which will be done to support our future growth.
Cash flows from financing activities
Our net cash used in financing activities was$3.5 million for the six months endedJune 30, 2022 , and is primarily related to cash used to pay withholding taxes on behalf of employees offset by proceeds received from the exercise of employee stock options. Our net cash provided by financing activities was$110.7 million for the six months endedJune 30, 2021 and is due to the net proceeds of approximately$145.4 million from our IPO and$1.3 million from the exercise of stock options, offset by cash payments of$35.4 million for tax payments related to employee stock based awards withheld upon vesting and of$0.6 million for accumulated dividends on our Series A convertible preferred stock.
Contractual Obligations
Royalties
We are engaged in, and in certain cases have settled, various claims and suits
alleging the infringement of patents related to certain television technology
that were initiated by television manufacturers and other nonmanufacturers. In
connection with the disposition of some of these claims and suits, we entered
into, or may enter into, license arrangements, which may include
32
--------------------------------------------------------------------------------royalty payments to be made for historical and/or prospective sales of our products. Certain of these settlements have included cross-licenses, covenants not to sue, and litigation holds.
In connection with these existing license agreements as well as existing or potential settlement arrangements, we recorded an aggregate accrual of$42.4 million for all historical product sales as ofJune 30, 2022 . To the extent that we are indemnified under product supply agreements with manufacturers, we have offset intellectual property expenses and recorded amounts as other receivable balances included in other current assets. Historically, we have been contractually indemnified and reimbursed by our manufacturers for most intellectual property royalty obligations and commitments. We will make future payments for the licensed technologies with funding received from the manufacturers, either through direct reimbursement from the manufacturers or payment of the net purchase price, as these royalty payments become due. In certain circumstances, we have the contractual ability to renegotiate the annual license fee in future years if certain unit sales volumes are not met in a given year. As ofJune 30, 2022 , we expect our future payments to total$21.8 million , which amount we expect to pay over a period of one to five years.
Operating Lease Agreements
We have various non-cancelable operating leases for our corporate and satellite offices primarily inthe United States . These leases expire at various times through 2027 and have total annual payments of less than$4.0 million per year.
Off Balance Sheet Arrangements
We do not have any off-balance sheet financing arrangements or liabilities, guarantee contracts, retained or contingent interests in transferred assets, or any obligation arising out of a material variable interest in an unconsolidated entity. We do not have any majority-owned subsidiaries that are not included in our condensed consolidated financial statements. Additionally, we do not have an interest in, or relationships with, any special-purpose entities.
Critical Accounting Policies
We prepare our condensed consolidated financial statements in accordance with accounting principles generally accepted inthe United States . The preparation of these unaudited condensed consolidated financial statements requires us to make estimates, assumptions and judgments that can significantly impact the amounts we report as assets, liabilities, net sales, costs and expenses and the related disclosures. We base our estimates on historical experience and other assumptions that we believe are reasonable under the circumstances. Our actual results could differ significantly from these estimates under different assumptions and conditions. We believe that the accounting policies discussed below are critical to understanding our historical and future performance as these policies involve a greater degree of judgment and complexity. The Company's significant accounting policies are discussed in "Index to the Consolidated Financial Statements-Summary of Significant Accounting Policies" in our Annual Report on Form 10-K. There have been no significant changes to these policies in 2022.
Recent Accounting Pronouncements
There have been no further developments to recently issued accounting standards,
including the expected dates of adoption and estimated effects on our condensed
consolidated financial statements and footnote disclosures, from those disclosed
in the audited consolidated financial statements included in our Annual Report
on Form 10-K.
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