We knew that the purchase of Cisco’s Connected Devices division was a gamble for France’s Technicolor, and right up until the end of Q3, it looked like it was paying off. But a combination of currency slides, spending freeze’s and production issues have slowed the Q4 number for Technicolor considerably.
It was always a deal about acquiring scale, but so too was the deal for Arris buying first Motorola Home and then Pace. We have seen that in that case 2 + 2 + 2 only adds up to about 5, and we are starting to see the same kind of sums happening here.
Technicolor was looking for EBITDA gains in excess of €200 million by the end of 2016 taking total EBITDA to €600 million to €630 million, and savings on top of that of over €100 million by 2018. It will actually record just $565 million, so in profit terms this is not a huge miss.
At the time the deal was cut we estimated the combined Connected Home division should have a revenue of around $3 billion from set tops and gateways, shipping around 60 million devices a year.
The Technicolor Board saw fit to provide an update this week, suggesting that what it would actually achieve in Q4 is closer to €650 million on top of the €1,985 for 2016 year to date. That brings revenues of just €2,635 – a shortfall of around €365 million against plan, as we said, 2+2+2 equaling closer to 5 than 6. Connected Home will record revenues for the full year of 2016 down approximately 12% compared to combined revenues for 2015.
Total company revenue at Q3 was €3,555 million, but figures for the other divisions have not been revealed for Q4, but are more or less on track with guidance.
The company has shed something close to one third of its share price since the deal was finalized.
The entire year’s EBITDA was €565 million and this included a negative foreign exchange of €10 million and a negative contribution from its exited activities of €5 million. It claimed it had grown the entire business 30% by adding Cisco and that it generated €240 million for the year in free cash flow.
Getting all the bad news out of the way at once, Technicolor detailed some minor adjustments as well – a legal action finally settled costing €48 million for some Cathode-ray Tube litigation cases in the US; lost money on British business on the devaluation of the pound; and some similar currency issues in Latin America. Lower than expected royalty payments from MPEG LA also shook Technicolor somewhat, where it takes part in patent pools for MPEG2 and 3D patents, but it signed more patent licenses, which we assume are direct and not through a patent pool and likely relate to either HEVC or HDR, bringing in €70 million in the fourth quarter alone.
Two large US mystery customers were mentioned who reduced capex, which we assume were Suddenlink and Cablevision – because the two largest cable players, Charter and Comcast, increased Capex this year. And it cited component shortages mentioned from the third quarter 2016 which were only resolved late in the fourth quarter and added the high pricing in the spot memory chip market in Q4.
The statement said that its North American business had a record year in terms of new contract wins, particularly with US customers.
Technicolor ended 2016 with net debt of €705 million, ahead of 2015 and says it will reduce debt further going forwards.
The emergence of OTT services in the US, may result in downward pressure in US set tops, along with the growing use of RDK and the invasion from CE manufacturers like Samsung and Humax into the set top market.