Technicolor can’t shift Connected Home division – so what’s next?

Technicolor has promptly canned its M&A plans while also slashing its full year 2018 EBITDA outlook by some €20 million, making a surprise U-turn to persevere with its struggling Connected Home division. Surely the business is beyond recovery – and if Technicolor can’t even find a private equity firm to take on the assets then the business is in serious trouble.

Back in November, the company said it was investigating a sale of its Connected Home division, prompting Faultline Online Reporter to suggest it should exit hardware altogether and focus on its growing VFX business. We think this outcome remains on the cards, despite Technicolor standing firm.

It’s likely there was a lack of lucrative offers as a result of waning interest in the set top sector, rather than Technicolor having a magic plan B up its sleeve. If there were indeed any offers at all, there isn’t a hope in hell they were anywhere near the $600 million Technicolor paid Cisco for the assets back in 2015.

As part of Technicolor’s statement citing it was “not engaged in any strategic discussions including or related to the Connected Home business,” it said it will prepay its €90 million loan from the European Investment Bank by the end of 2018 – meaning it will be free of covenants. Yet it altered its EBITDA outlook down to between €265 million to €275 million for 2018, while also citing continued growth in the Product Services business, primarily from the Film & TV Visual Effects unit, to offset losses in the DVD business.

So, we can expect much the same story from Technicolor’s full year results as seen in its last financial filing, hence our guidance to focus on VFX, where revenue grew by 4.6% to €383 million in the first half of 2018, while Connected Home dropped by 13.6% to a little over €1 billion. The continuing shortage of key components is expected to significantly dent the company’s full year results and also its early 2019 performance, following the €210 million worth of orders it failed to deliver in H1 2018. This mostly concerned MLCCs (Multilayer Ceramic Chip Capacitors), a type of package for integrated circuits.

Technicolor’s market cap now sits at around €389.4 million, a steady recovery since it fell to €307.3 million upon declaring its desire to sell all or part of the Connected Home business less than two months ago.

But prior to the surprise statement from Technicolor was a more positive press release, one suggesting what lies ahead for the shrinking set top business. It announced the launch of a new Android TV device in partnership with German multiscreen vendor 3SS, building on a previous collaboration between the two in Android TV.

The 3Ready Android TV launcher from 3SS is now pre-integrated with Technicolor’s Pearl set top targeted at Asia Pacific and African markets. 3SS claims the custom launcher delivers a superior user experience compared to standard launchers, and supports operator roadmaps by enabling customization and branding, along with A/B testing to understand consumer demands. It highlights supporting new market entrants seeking to cement a footprint, promising to accelerate implementation and revenue flow.

We know of 3SS implementing the set top UI for Canal Digital’s hybrid DTH OTT service which delivers to a Technicolor Android TV set top as well as mobile devices, while 3SS has also developed apps for Unitymedia, Swisscom and Com Hem. The two vendors have said they are currently working together on some “major” new Android TV operator tier projects.

As much as we’d love to see one or more of these announced at CES 2019, the timing might just be a touch too soon. Plenty of Android TV coverage to come from elsewhere at CES next week though and throughout the coming year, we can be sure of that.