VIZIO (NYSE: VZIO) | Streaming Giant In The Making?

Updated: Aug 1


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Key Points

  • VIZIO is a leading affordable Smart TV and soundbar manufacturer in the US that went public through an IPO on 25 Mar 2021

  • It has expanded into the streaming platform segment through its Platform+ service

  • Platform+ revenue, comprising of SmartCast (proprietary operating system) and Inscape (ACR provider), has high margins and grew by 132.9% in FY20

  • Headline figures conceal rapid Platform+ growth

  • Expansion of Platform+ will improve business fundamentals

  • DCF-based fair value estimate of US$22.70, representing a possible downside of 5.4%

Company Overview


VIZIO is a leading affordable Smart TV and soundbar manufacturer in the US that aims to be the centre of the home portal through the integration of its Platform+ services.

VIZIO sells its own brand of devices and layers on its Platform+ services – SmartCast and Inscape, onto its Smart TVs to generate additional revenue.


SmartCast, its pre-installed proprietary operating system, supports many leading streaming apps (i.e. Disney+) and provides broad support for third-party voice platforms (i.e. Amazon Alexa). While Inscape, a free opt-in service, uses Automatic Content Recognition (ACR) technology to collect viewing behaviour data which helps to generate more personalised content and ads for users.

Its Platform+ service has 3 main monetisation streams - Advertising, Data licensing, and Content distribution, transactions and promotion, out of which, advertising accounts for the largest proportion of revenue.

The combination of Device and Platform+ has created a flywheel effect as growth in Smart TV sales propels SmartCast adoption that drives engagement and monetisation which flows back into creating higher quality/cost-effective Smart TVs and the cycle continues.

Given that Platform+ is a relatively new segment, it commands a significantly smaller share (7.2%) of total FY20 revenue compared to Device (92.8%). However, Platform+ revenue has expanded rapidly at a CAGR of 101.2% from FY18 to FY20 and management expects it to continue outpacing Device's revenue growth.

Management


VIZIO is led by its founder, Mr William Wang, and a management team who have on average at least 10 years of experience in the television/entertainment/advertising industry, which will be critical in aiding the expansion of Platform+ that is still in the early stages of growth.


I like that the founder has constantly focused on improvement and grasps the importance of expanding into the platform segment as noted in VIZIO's S-1 and has stuck to its founding principle of “Where Vision Meets Value” as seen from its track record of quality yet affordable devices.

Financial Highlights


1. Total Revenue

VIZIO’s overall revenue grew 14.7% from FY18 to FY20 primarily due to a surge in FY20 revenue as stay-at-home restrictions fueled demand for Smart TVs and soundbars which caused Device revenue to spike 6.9% YoY. This led to increased SmartCast adoption which combined with rising average revenue per user (ARPU), increased Platform+ revenue by 132.9% YoY, pulling total FY20 revenue higher.


2. Gross Margin

VIZIO’s overall gross margin grew 8.3% pts from FY18 to FY20 mainly on Platform+'s revenue proportion more than tripling to 7.2% that also benefited Platform+ margins as return to scale kicked in.


The sharp uptick in FY20 gross margin was further propped up by a temporary suspension of device discounts due to pandemic-fueled device demand that caused Device gross margin to climb 2.7% pts. However, management cautioned that the increase in Device gross margin is unsustainable and will return to normalised levels in the future.


3. NPAT

The expansion in top-line and overall gross margin helped VIZIO turn NPAT positive in FY19 and improved NPAT by 343.9% in FY20.


4. Debt


Its current ratio stood at 1.10 as of 31 Dec 2020, representing a healthy short-term liquidity position. It is in a net cash position of US$199.7 mil in part due to its asset-light operating model as it outsources manufacturing. In addition, its negative net working capital enables it to internally finance growth as its cash increases with scale.

Theses


1. Expanding Platform+ improves VIZIO's fundamentals


The expansion of Platform+ has 2 main benefits - grows recurring revenue and increases gross margins.


a) Grows recurring revenue


SmartCast active accounts automatically generate revenue once they log on to the SmartCast platform as monetisation streams such as advertising start kicking in. Given that the average TV replacement cycle is about 10 years, the runway of recurring revenue for SmartCast active accounts is extremely long and thus, the increasing scale of SmartCast grows recurring revenue. This is particularly important for VIZIO as it partially offsets any cyclicality in the Smart TV industry.


b) Increases gross margins


I expect that Platform+ will continue growing its gross margin over the long term for 2 factors.


Firstly, the more data Inscape collects, the more targeted its advertisements will be. This could potentially attract more advertisers to Platform+ who may bid up ad rates.


Secondly, as SmartCast gains scale and drives engagement, it will attract more advertisers to the platform, potentially driving up ad rates in the same way Roku, an established streaming platform, is doing.