Vizio Device Gross Profit Fell 88% as It Seeds Market for Platform+

Vizio’s Q2 device revenue plunged 11% to $298.1 million, while ad revenue grew 71%, driving the Vizio's Platform+ business to $110.8 million, said the company's quarterly report Wednesday. Device gross profit plunged 88% to $4 million with a 1.3% gross margin, while Platform+ gross profit rose 47% to $69.9 million with 63% gross margin. The stock closed 18.1% higher Thursday at $12.33.

The vendor chose to make its TVs “really affordable” this year due to inventory challenges at retail, said CEO William Wang on an earnings call Wednesday. Amid all the macroeconomic challenges, “the whole idea is just to make more money ... for the shareholders,” he said. “And if we can, we will subsidize TV sets.”

Michael O’Donnell, chief revenue and strategic growth officer, highlighted Vizio’s dual-revenue model from the devices and platform business. He cited Vizio’s “blended” approach to TV pricing and said the company works closely with retailers on schedules for merchandising and promotions around selling events such as Black Friday. If Vizio takes a much lower margin on a couple of targeted SKUs, “other SKUs are generating higher margins,” he said.

On a “blended basis, we can help manage the overall gross profit contribution from the TV business,” O’Donnell said. “We’re willing to be at a low gross profit margin on our TV unit sales because they’re so valuable once we get those units in homes and generate that recurring revenue stream that comes from our [average revenue per user] model.” With the “useful life” of a TV at six to seven years, and with ARPU above $25 now, “the customer lifetime value is incredibly high for us,” O'Donnell said. The model is working well for Vizio, and “we want to lean into that approach.”

Vizio’s promotionally priced 50-inch V Series TV was the top-selling model in the country in Q1 and again in Q2, Wang said. The company extended the competitive pricing strategy to include additional SKUs, including the 40-inch D-Series model, which was No. 2 in the quarter. Vizio is going to “continue to look at that strategy and look at other possible models in our fleet that could have similar types of results,” said Chief Financial Officer Adam Townsend.

On how Vizio chooses which models will take steep price cuts, Townsend said the company knows the usage levels by series, “so we have a sense of what units tend to over-index in terms of engagement" and therefore offer ARPU opportunities for the company. That data figures into “which units we want to be more aggressive with in pricing.” The V-Series 50-inch is “a very highly engaged unit” that’s likely to be the main TV in a household, he said. V-Series users also tend to use Vizio’s free, ad-supported WatchFree+ platform, “where our best monetization occurs,” Townsend said. “There is a connection between our pricing strategies and how the usage trends translate into our ARPU opportunity.”

Vizio's TV shipments grew 5% to 1.1 million in Q2, Townsend said, offset by lower average selling price due to “strategic pricing promotions.” The company also said it shipped 1.1 million units in Q2 2021. It didn’t respond to our questions about how it calculated a 5% shipment increase from the same volume of unit TV sales in the year-earlier quarter.

Townsend noted the “high contribution margin of our platform business,” saying Vizio remains focused on building “great products at competitive pricing” to expand its installed base. The Platform+ business was 95% of the company’s gross profit in the quarter. Vizio’s SmartCast active accounts grew 15% to 16.1 million; viewing hours increased 22% to 4.3 billion, Townsend said. Average revenue per user jumped 54% to $25.87.

Addressing some softness in the advertising scatter market, O’Donnell cited automotive and consumer packaged goods but said Vizio hasn’t felt it yet “because we’re working off a smaller base,” being “only two-and-a-half years into this.” Vizio’s new advertiser count grew 74% in Q2 on the direct sales side and 240 overall, he said.

Responding to a question on supply chain, Wang downplayed any issues for Vizio, crediting the company’s team for managing supply chain over the past three quarters. The biggest challenges for the company currently are “macroeconomic headwinds and demand issues,” he said.

Vizio’s Platform+ non-advertising revenue grew 65% to $30 million year on year, Townsend said, citing an acceleration in data licensing revenue resulting from its previously announced deal with Nielsen, plus brand placement on Vizio’s remote control buttons. Vizio’s first-party data is becoming “the cornerstone of the CTV measurement market” through additional relationships with iSpot.tv, Comscore, VideoAmp, 605 and TVSquared, “who all rely on our data to fuel their ad currency products,” he said.

Total revenue in Q2 was $408.9 million, up 2% year on year, Vizio said. Its financial outlook for Q3 is for Platform+ revenue of $120 million-$125 million with gross profit of $75 million-$78 million. Revenue from political advertising in Q3 is a "wild card," said Townsend.