Brightcove Inc (BCOV) 2012 Q2 法說會逐字稿

Greetings and welcome to the Brightcove second-quarter 2012 earnings conference call.

At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Brian Denyeau, Investor Relations for Brightcove. Thank you, Mr. Denyeau, you may begin.

Good afternoon and welcome to Brightcove's second-quarter 2012 earnings call. Today we will be discussing the results announced in our press release issued after the market closed today.

With me on the call today are Jeremy Allaire, Brightcove's Chairman and Chief Executive Officer; David Mendels, President and Chief Operating Officer; and Chris Menard, Brightcove's Chief Financial Officer.

During the call we will make statements related to our business that may be considered forward-looking and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements concerning our financial guidance for the third fiscal quarter of 2012 and the full year of 2012, our vision to execute on our growth strategy, our ability to expand our leadership position, and our ability to maintain existing and acquire new customers.

Forward-looking statements may often be identified with words such as we expect, we anticipate, upcoming, or similar indications of future expectations. These statements reflect our views only as of today and should not be seen as representing our views as of any subsequent date.

These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations. For a discussion of the material risks and other important factors that could affect our actual results, please refer to those contained in our final prospectus related to our initial public offering filed pursuant to Rule 424(b) under the Securities Act with Securities and Exchange Commission dated February 17, 2012, and is updated by our subsequently filed quarterly reports on Form 10-Q and our other SEC filings.

Also, during the course of today's call we will refer to certain non-GAAP financial measures. There is a reconciliation schedule showing GAAP versus non-GAAP results currently available in our press release issued after the close of market today, which is located on our website at www.brightcove.com.

In terms of the agenda for today's call, Jeremy will begin with a summary overview of our market opportunity and financial results. Dave will then provide an update on our product innovation and go-to-market strategies. And then Chris will finish with additional details regarding our second-quarter 2012 results, as well as our guidance for the third quarter and full year 2012.

With that let me turn the call over to Jeremy.

Thanks, Brian, and thanks to all of you for joining us today to review our second-quarter results, which were well ahead of our guidance from both a revenue and profitability perspective. Our second-quarter results were highlighted by revenue of $21.6 million, which represents growth of 41% on a year-over-year basis.

Brightcove sits at the center of a number of powerful megatrends in the marketplace -- video, mobile, cloud, and social. Each day we see more evidence that companies across a wide spectrum of industries and size are embracing online digital content as a way to deliver more compelling experiences to consumers across multiple destinations and devices. Increasingly Brightcove customers embrace video and immersive cross-platform apps as effective tools to increase brand awareness, engagement, and loyalty, which ultimately leads to improved business performance.

The increasing ubiquity of smartphones and tablets, along with expectations of future rapid growth and the adoption of Internet-connected Smart TV platforms makes delivering digital content quickly and seamlessly both more important and more complex. Being able to reach audiences wherever and however they are choosing to interact with digital content is no longer a nice-to-have, it is a must-have.

And media companies and marketers have a choice. Will they attempt to solve this problem themselves and spend more and more time and resources on a technology problem that is outside of their core competency or will they turn to third-party cloud content service providers with significant scale that can help them to stay ahead of the rapidly changing technology landscape?

We believe our value proposition is compelling and that businesses and organizations from nearly every sector of industry and society are now turning to third parties to help them manage their digital content needs. We are at the early stages of this market and our focus is to build on our market-leading position by driving greater innovation and faster time to value.

Consistent with this focus, we are excited to announce the signing of a definitive agreement to acquire Zencoder, a leading provider of cloud-based video encoding services and free HTML video player technology. Zencoder has more than 1,000 paying customers for their encoding services ranging from individual developers and small businesses to larger global brands such as PVS, IGN, SmugMug, Yammer, TwitVid, College Humor, Ooyala, and Funny or Die.

According to a builtwith.com, a third-party Web technology adoption reporting firm, Zencoder's Video.js HTML5 player is used on over 24,000 websites by organizations across many industries including Montblanc, Dolce & Gabbana, Diesel, Illy, Applebee's, Maytel, Kellogg's, Les Echos, the US Navy, Aetna, Transamerica, Washington State University, and many, many others.

Let me walk you through the strategic rationale of this acquisition.

First, video encoding is an essential element in online video content delivery that enables customers to take their video libraries and convert them into formats that are compatible with any computing device or platform. With the increasing number of videos and the expanding number of devices on which video can be consumed encoding has become even more complex and time-consuming.

Historically, customers with large video libraries have solved this problem through a combination of hardware and software that often entails throwing more servers at the problem. This approach is inherently expensive and inefficient as customers have to build out server capacity that may only be used on occasion, leading to underutilized server farms and wasted OpEx.

We believe the increasing availability and lower costs of broadband and Zencoder's best-in-class technology make the encoding market right for migration to the cloud. Zencoder is one of a handful of companies leading this disruption.

Secondly, the video encoding market opportunity is a component of the overall OVP market which we have sized as a $5 billion opportunity by 2016. Frost & Sullivan sizes the transcoding market at $264 million in fiscal year 2012 with estimated growth to $630 million by 2017, representing a 24% CAGR. We believe the addition of Zencoder will help Brightcove to capture this spend in several ways.

First, over time we will be integrating Zencoder encoding technology into our core Video Cloud platform, further extending our competitive advantage in end-to-end platform valuations. Second, Zencoder will provide us with the ability to deliver a premium option for existing customers who are looking for the advanced features, additional control and premium performance that Zencoder brings relative to our current encoding capabilities.

Third, we plan to continue to offer Zencoder's cloud-based encoding service as a stand-alone product. Zencoder represents our initial move into offering customers the opportunity to use aspects of our technology as a set of discrete, functional utilities available through cloud APIs. This Platform-as-a-Service model will allow us to gain a foothold with do-it-yourself customers and eventually migrate them to adopt more services and our full end-to-end platform.

Another attractive aspect of the Zencoder transaction is that it owns and distributes Video.js, a fast-growing, free online video player. Video.js is an open source player that was built from the ground up around HTML5 and is seeing rapid adoption in the past 24 months, currently used on nearly 3% of the top 10,000 Web sites in the world.

With Video.js we will be able to offer a premium model for the display of digital content which can serve to drive increased customer awareness and lead generation for our Video Cloud Express additions. We are thrilled to have the talented employees of Zencoder joining the Brightcove family, and we are excited about leveraging the excellent technology their hard work has created.

Also in Q2, we held our annual user conference, Brightcove PLAY, which brought more than 600 participants together to discuss the latest trends in the digital media industry. One of the most exciting topics of the week was the buzz around Apple TV and the future of media consumption in the living room.

Here we unveiled our new App Cloud dual-screen solution for Apple TV. This innovative new solution enables media publishers to develop rich content apps for the iPhone and iPad that can simultaneously control the content and data presented on an HDTV and synchronize it with content on the iPad or iPhone by leveraging Apple's AirPlay technology.

This is a very cool piece of technology that will allow consumers to take the rich contextual content they are used to from mobile devices, like their social media streams, statistics, player info, and trivia, and marry it to HDTV in their living room. Consumers are used to multitasking in their content consumption habits and we think they will increasingly demand a seamless way to do this in their living rooms.

At PLAY we also announced the introduction of App Cloud Core, a free version of our App Cloud platform that makes it easier for app developers to leverage our open source SDK and become familiar with the unique capabilities of App Cloud. David will walk you through the details of our new App Cloud offerings in a moment, but I wanted to share my view that I believe Brightcove is well-positioned to emerge as a market leader in mobile app platforms.

Finally, I would like to take a moment to recognize our CTO and co-founder, Bob Mason, who will be leaving Brightcove to pursue his next adventure. I've known Bob for almost a decade and he has been an important contributor to our products over the years. While we are sad to see him go, we wish him well on his new endeavors.

We have a very strong technology team in place and it will grow even stronger with the addition of Zencoder's management team and employee base.

With that let me now turn the call over to our President and Chief Operating Officer, David Mendels. David?

Thank you, Jeremy. I would like to take a few minutes to review some highlights from the second quarter as well as some of the exciting new innovations that we announced at PLAY.

In the second quarter we continued to expand our customer base which ended the quarter at 4,697, a 43% increase year over year. The horizontal nature of the market we are serving continues to be evidenced by the diverse range of customers selecting Brightcove as their strategic vendor for managing and distributing their online digital content.

During the second quarter we sold our solutions to customers across numerous industries and verticals, such as CBS's Entertainment Tonight who recently chose Video Cloud, migrating away from a smaller vendor who was unable to keep up with the pace of innovation in the industry. Other notable Video Cloud wins included Parametric Technology, Chrysler, Princeton Review, and Quintiles.

We also had some exciting wins for App Cloud in the second quarter, including Allstate, who is utilizing App Cloud to build an internal news app, and Manchester City Football, an existing Video Cloud customer who added App Cloud in the second quarter.

We are also continuing to see strong upsell activity in our customer base, which is a significant component of our growth strategy and a great validation of the value our customers derive from our solutions. One example of this is ancestry.com, who became an Express customer in early 2011, and as its use of video continue to grow it upgraded their Express package to our $499 addition. And in the second quarter upgraded again to become a Premium customer.

Year-to-date more than 80 customers have upgraded from Express to Premium, which compares to 125 upgrades in all of 2011.

Besides the expected acquisition of Zencoder, which Jeremy previously discussed, we have continued to bring significant new innovation to our core Video Cloud solution. In the second quarter we announced that we had introduced a series of content management system integrations to the market, which enabled millions of website publishers to more easily capitalize on the growth of online video by connecting their existing web publishing workflow into a video publishing workflow.

Publishers can now take advantage of prebuilt integrations between Video Cloud and leading content management systems, like Adobe CQ5, Agility, Atex Polopoly, Drupal, Ektron, Sharepoint 2010, Sitecore, and WordPress.

As Jeremy alluded to, we also significantly improved App Cloud during the quarter. We have introduced App Cloud Core, making the core developer technologies free and open source. This makes it easier than ever for app developers to leverage the development capabilities of the platform. We also added numerous powerful features to enhance developer productivity.

App Cloud Core is available for free to developers and it is intended to drive increased adoption. We also introduced a new volume edition App Cloud Pro priced at $99 a month for up to 10,000 user sessions per month and offers organizations access to the entire suite of functionality within App Cloud. This includes cloud content services and powerful business user tools, like real-time analytics, unlimited push messaging, content optimization, and the ability for the business user to update the apps easily.

App Cloud Enterprise is our premium offering and it includes 24/7 support, advanced integration features, and other tools for managing more complex environments. Enterprise is offered under annual pricing and is ideal for customers with high-volume apps with more than 100,000 user sessions per month.

In the short time that App Cloud has been on the market we have been extremely pleased with the customer feedback and have clearly validated that the product meets a significant market need and that there is a substantial market opportunity. We believe our updated pricing and packaging strategy will create even more momentum around App Cloud in the marketplace. We know we have the most robust solution on the market, and with App Cloud Core and Pro we are making it easier to adopt an accelerating time to value.

With that let me turn the call over to Chris to walk you through the numbers.

Thanks, David. As Jeremy mentioned, we are pleased with our second-quarter revenue and operating results which exceeded our guidance on both the top and bottom lines. For the second quarter total revenue was $21.6 million, a 41% increase from $15.3 million in the second quarter of 2011 and above our guidance of $19.5 million to $19.9 million.

Subscription support revenue of $20.7 million was up 43% year over year and drove the upside in the quarter. This was primarily due to the timing of new business as well as overage fees. Overage fees are based on several usage measures and they were a record high and significantly above our expectations for the second quarter.

Professional services and other revenue was $902,000, up modestly from $802,000 in the second quarter of 2011.

Turning to revenue mix, our Premium offerings generated $19.8 million of our total revenue, representing a 42% year-over-year increase, while our Express offering generated $1.8 million in revenue, a 41% increase from the second quarter of 2011.

On a geographic basis we generated $13.6 billion of revenue in North America for the quarter, which was up 37% year over year and represented 63% of our total revenue. Europe recorded $5.3 million, a 44% increase and 25% of total revenue, while Japan and Asia Pac generated $2.5 million of revenue for the quarter, up 57% year over year and representing 12% of total revenue.

From a vertical perspective, non-media customers represented 60% of our second-quarter revenue and grew 55% on a year-over-year basis, while our media customers represented 40% of our revenue and grew 24% year over year. We continue to see a very broad horizontal market opportunity.

Let me review some additional metrics. We ended the second quarter with 4,697 customers, which is up 43% from the end of the year-ago period. We added 443 new customers in Q2, which included 78 premium customers and 365 express customers.

Our year-to-date average monthly video streams as of June 30 were 674 million. Excluding the impact of AOL, as we did last quarter, our average monthly video streams were up 22% on a year-over-year basis.

As a reminder, video streams have not historically been a good predictor of revenue and we do not expect them to be in the future. The number of streams in any given quarter can vary depending on things like major news and customer events.

Also, all video streams are not created equal. Customers purchasing the highest volume of video where there can be meaningful variability also carry the lowest pricing. It is important to appreciate that we recognize revenue ratably over the life of the contract, not on the amount of usage utilized in a given period.

Our recurring dollar retention rate was 97% for the quarter, up from 93% in the year-ago period. The recurring dollar retention rate can have some variability quarter to quarter, and while we are pleased with the second-quarter performance, we are not expecting it to remain in the 97% range going forward.

As a reminder, our target is greater than 90% and we believe that level is a good indicator of the value our customers derive from our products. In addition, our ability to retain our customers is an indicator of the stability of our revenue base and the long-term value of our customer relationships.

Moving down the P&L, our non-GAAP gross profit in the second quarter was $15.2 million, a 47% increase from a year ago and a gross margin of 70%. Subscription and support revenue represented approximately 96% of our total revenue and had a 75% gross margin while services revenue represented approximately 4% of our total revenue and a negative 32% gross margin. We expect our total gross margin to expand over time given the inherent leverage of our ratable subscription model, in addition to improved services margins as we gain leverage from the organization.

Turning to non-GAAP operating expenses, our sales and marketing expenses in the second quarter were $9.4 million, or 43% of revenue, versus 53% of revenue in the second quarter of 2011. The absolute dollar growth in sales and marketing expense reflects the investments we are making to build out our global sales footprint.

R&D expenses were $4.4 million, or 20% of revenue, compared to 24% in the year-ago period. G&A expenses were $3.6 million, or 17% of revenue, versus 17% in the second quarter of 2011. G&A expenses were higher on an absolute dollar basis due to the significant costs associated with becoming a public company and the expansion of our global footprint.

Within G&A we incurred $479,000 of transaction costs related to our acquisition of Zencoder, which we have excluded from our non-GAAP results. Non-GAAP operating loss was $2.1 million in the second quarter, an improvement compared to a loss of $4 million in the second quarter of 2011 and better than our non-GAAP operating loss guidance of $3.5 million to $3.8 million as almost all of our revenue overachievement fell to the bottom line.

Non-GAAP net loss per share was $0.10 based on 27.3 million weighted average shares outstanding, better than our guidance of a loss of $0.13 to $0.14 per share. This also compares to a per-share loss of $0.91 on 4.8 million weighted average shares in the year-ago period. On a GAAP basis our gross profit was $15.2 million, operating loss was $3.9 million, and our net loss per share was $0.16.

Turning to the balance sheet, we ended the quarter with cash, cash equivalents, and investments of $58.6 million, which was a decrease of $2 million from March 31. Subsequent to the close of the quarter, we will pay $30 million for the acquisition of Zencoder.

From a cash flow perspective, we used $1.3 million in cash from operations and invested $927,000 in capital expenditures during the quarter, which equates to a negative $2.2 million of free cash flow for the quarter. Our deferred revenue balance at quarter end was $16.2 million, up 62% year over year.

We would remind investors that deferred revenue is a less relevant metric for Brightcove than other SaaS vendors as a material portion of our overall Premium billings remain on a monthly or quarterly terms. In addition, the majority of our Express customers are billed on a monthly basis and invoiced via credit card.

Before I turn to guidance, I would like to review the terms and forecasts of the Zencoder acquisition which we announced today.

We are paying $30 million in cash for Zencoder, which includes a retention component. We expect to recognize approximately $1 million in revenue during the second half of 2012. The revenue for the full year 2012 will be approximately $2 million and, as we look ahead to 2013, we expect those revenues to double.

From a profitability perspective, we currently expect Zencoder to increase our operating loss by approximately $1.2 million for 2012 and will continue generating losses until the fourth quarter of 2013. It is worth noting that moving forward our non-GAAP operating income will also exclude the non-cash amortization of intangibles associated with the Zencoder acquisition.

As Jeremy and David have mentioned, we are excited by our acquisition of Zencoder and think it can provide another opportunity to expand our share of wallet with our customers.

Finally, I would like to provide our overall outlook for both 2012 and the third quarter, both of which will include contribution from Zencoder. For the full year we expect revenue of $85.3 million to $86 million. This is up from our previous guidance of $81 million to $82.5 million and it represents year-over-year growth of 34% to 36%.

We are targeting a non-GAAP operating loss of $10.5 million to $9.5 million. This represents an improvement from our prior guidance of a non-GAAP operating loss of $11 million to $10 million and includes the dilutive impact of the Zencoder acquisition.

Non-GAAP net loss per share is expected to be $0.47 to $0.44 for the full year 2012 based on 24.5 million weighted average shares outstanding, which is an improvement compared to our prior guidance of a non-GAAP loss per share of $0.44 to $0.48.

We continue to target negative free cash flow of $10 million to $10.5 million for the full year. In addition, we are still forecasting to be cash flow positive in the fourth quarter for the base Brightcove business, and around the cash flow neutral level after taking into consideration the impact of Zencoder.

For the third quarter we are targeting revenue of $21.1 million to $21.6 million, or 27% to 30% growth, on a year-over-year basis. A few assumptions worth noting for our third-quarter revenue guidance.

First, we expect a few hundred thousand dollars in contribution from Zencoder. Second, we continue to forecast a lower level of overage fees than what we experienced in both the first and second quarters as they do have a level of variability and we do not have a long enough history to assume recent levels are repeatable in our forecast.

From a profitability perspective, we expect a non-GAAP operating loss of $3.1 million to $2.8 million for the third quarter with Zencoder having a negative $500,000 impact that is included in our guidance. We expect a non-GAAP net loss per share of $0.12 to $0.11 based on 27.4 million weighted average shares outstanding.

In summary, we are pleased with our second quarter as a public company which was well ahead of expectations for the second time in as many quarters. We are optimistic about Brightcove's outlook for the remainder of the year and believe that we are well positioned as the market leader in an emerging multibillion-dollar market opportunity.

Operator, we are now ready to begin the Q&A session.

(Operator Instructions) Adam Holt, Morgan Stanley.

Thank you and congrats on the quarter. Why don't I start on the Express business; you have a real sort of explosion of customers there. I know you had some new tiers. Maybe walk through what drove the real acceleration in customers there.

No problem. We don't disclose the customers by tier, per se, but I can give you some stats to help you get a better picture for where we are today.

At this point last year our average subscription revenue on a monthly basis per Express customer was $175 and at the end of this quarter it is $165. We continue to do a really good job upselling per video customers from $5, $10 a month up to $99, but also from $99 to $199 and $199 up to $499. So no real erosion in revenue per customer.

Okay, perfect. Then on the overage side, again you suggested the overages -- you are not assuming the overage continues into the current quarter. But what were some of the elements behind the overage this quarter and why wouldn't they continue into next quarter?

So it is the usual things we see with overages. It is timing of where our customers is in their contract. As you know, there is lots of things that can affect overages. It could be storage, it could be streams, it could be usage.

And while we have seen record overage levels in Q1 and Q2, it is still too early to say that is the trend. So I am assuming that we are going to have more overage revenue than the historical averages, but I am not at a point yet where I am going to use the same levels we saw in the first two quarters of this year.

Terrific. Then just lastly on the enterprise side. The enterprise side continues to be strong, both in the absolute and on a relative growth basis. What were some of the key factors behind that in the quarter? It looked like it was the fastest-growing segment. Thanks very much.

Non-media? I think you mean non-media, Adam.

Yes, so we just continue to see a great trend of companies realizing the power of video for marketing, and that is around every aspect of marketing from generator awareness, conversion, and then post sales product customer service and support as well. And so it is a great value proposition.

Large enterprises that are not media companies certainly recognize the power of video, and we provide a solution that lets them really take advantage of video to really solve core marketing and communication needs. And so we continue to see great customer adoption there.

I would also say our target account model -- we have been continuing to invest in and grow the tele-prospecting organization, the channel sales organization, both of which are very heavily focused on the enterprise segments and key target accounts in the enterprise segments. And we are getting good yield from those investments I think.

I think one of the other things that we are really excited about; if you take a look at the average revenue per premium customer, it is up about 5% compared to what we saw at the same period last year.

Great, thank you.

Tom Roderick, Stifel Nicolaus.

This is actually [Gore] on for Tom. First off, nice job on the quarter. I had a question about the open source strategy.

You launched an open source version of the App Cloud recently and you just acquired a leading open source video player. Can you talk about the open source model and why you're confident you can really convert some of these free customers?

Sure, this is Jeremy. At the core of that is a growing belief that we have that developers, web developers and app developers, are a highly influential audience in the adoption of technologies today for both content publishing and for apps.

The preferred model of developers is to get started with an accessible, easy-to-adopt toolkit or SDK or API, and really that has been a model that has been successful for a lot of companies. Both David and myself have had a lot of success with similar kinds of models at Allaire and Macromedia and Adobe. We think it is vital that we grow that developer audience significantly. App Cloud Core is very much about that.

Video.js, as I talked about in my comments, we are very excited about the rapid traction it has. Obviously, we are in the early stages of really the integration side and the go-to-market side there. But as the comments that I made earlier and David reinforced, we really look at this as a premium model into the Video Cloud Express business, as well as a way to solidify our position with the millions of Web and application developers that are out there and influencing technology decisions.

Great, thank you. And with regard to Zencoder, I may have misheard, but did you say that Ooyala was a customer of theirs?

I did say that, yes. They are a customer.

With regard to that, and to the extent you can answer this question, how disruptive would a change in the trans-coding engine be for I know you guys or for a similar company?

Well, to be very clear, we plan to continue to offer the Zencoder service. Obviously, we compete with Ooyala, we may compete with other companies that still want to use some of our services, so we are very comfortable with a co-opetition model. We are happy to have them as a customer.

We expect that we will continue to provide great service and they can continue to be a customer. So I don't want to assume that there will be a disruption. Obviously, whenever you have a disruption that can be problematic. I don't want to speak for them certainly.

Got it, thank you. Then one last question; I was hoping you could talk a bit about the growth within the premium customer base. Net adds were slightly lower than the sort of historical trends for the last five or so quarters.

Did something happen specifically in the quarter and how is the pipeline looking for that business? Thank you very much.

This is Chris. No, nothing really happened that was significant or different in Q2. I think if you go back and you look at our averages over the last five or six quarters we are averaging about 99 to 100 net new customers per quarter. At the halfway point of this year we are right on those averages. The pipeline looks good and we are excited about the rest of the year.

Got it, thank you.

Brendan Barnicle, Pacific Crest.

Thanks so much. Jeremy, you briefly touched on some increases you have had in the distribution channel. I was wondering if you could give us any more detail on the increases in expansion that has gone there through the quarter and the outlook for the remainder of the year.

Sure. We have a strong group that is focused on building relationships around resale and referral with solution partners, agencies, systems integrators. And that is a group that has been in place for a while; it is a core strategy of our. They happened to have a very good quarter working with agencies that service brands and in particular, as we talked about earlier, some of those non-media enterprises.

It's a great way to penetrate those companies because they often act as a trusted advisor to the CMO or the SVP of Digital Marketing for those large brands, and so we continue to pursue that strategy. We have some great partnerships in that area and we think there is a lot of opportunity for that to continue to grow over time as we build the relationships.

Then each time you build a relationship with an agency and you get success with first one customer and then two customers, hopefully over time we can start to acquire their whole portfolios. And so that is certainly the strategy that we have been pursuing and we will continue to pursue.

Then you mentioned the expansion that we are seeing in digital marketing, and obviously you guys are moving, with the Zencoder acquisition, more into the development side. Would you ever envision moving through acquisition or through new products kind of further up the channel rather than on the development side into some additional new products that are in that digital marketing category?

This is Jeremy. I think we think about Video Cloud and App Cloud as both being very heavily targeted at the digital marketing segment. The key thing to think about though is our products really address a number of distinct needs across the organization, i.e., we have got APIs and SDKs and Web services for developers. We have got tools for designers and producers to create experiences and publish content.

We have features that are for business users as well. We have been making increased investments in our own analytics technology, which is fundamental to building the kinds of data-driven decision making that marketers value in digital content. And so we are absolutely investing in features that are of value to the business users in the marketing organization so that continues to be a focus with both Video Cloud and App Cloud.

Could we conceive of additional incremental services in our suite? Absolutely. Earlier this year, just as an example, in App Cloud we launched turnkey push notification campaign management. So if you have got an app out there and you want to market and communicate to the users of your app or give them promotions or offers, they can use that campaign tool in a simple user interface to get those marketing promotions out with real-time analytics behind it.

So that continues to be a focus in the core products in our suite. Certainly we can conceive of other ways that we can assist digital marketers going forward.

Great. Then, Chris, just one last one for you. You mentioned the 97% dollar retention rate and not to expect that going forward. Was it just overage that drove that or was it this upsell that you've had with existing customers that drove that? And why wouldn't you expect that to continue other than just that has not been the precedent?

Sure. First, overages don't affect the recurring dollar retention rate. It is all upsells at the time of renewal or just renewing for closer to 100%. So we had a great quarter in terms of upselling into the base at the time of renewal, and that is what drove it up to the 97%.

I would say in terms of what we are thinking of going forward, it is kind of like overages in general. I can't tell you yet if it is a blip or a trend. I hope it stays at about 97%, but as you know over the last year-and-a-half we have been pretty steady at 93% or 94%. So we will watch it going forward and as long as it stays in the low 90%s we are pretty happy overall.

Great. Thanks, guys.

(Operator Instructions) Terry Tillman, Raymond James.

Thanks, guys. Thanks for taking my questions and congrats from me as well.

David, you had talked about, in your prepared remarks about the success in upselling and graduating customers from Express to Premium. Could you maybe help us a little bit more in terms of how much low-hanging fruit you have in terms of just going back into the installed base that you currently have to create that upsell opportunity? And have you started to target that opportunity on the international front?

Yes. I think that -- I don't know if I would characterize it as low-hanging fruit, but we have about 3,200 Express customers that -- and we have a continued inbound inflow of those Express customers. We think many of those are very good opportunities to move up, first from perhaps that per video offer that might start as low as $5 up to $99, $99 to $499, and then $499 up into the $10,000-plus Pro range. And we have seen that so I think there is a good opportunity to mine it.

It is part of the reason that Express is not just a good business in and of itself, but it is a strategic inbound on-ramp for the whole company and for the Premium business as well. We do mine that internationally and so at that Express business continues to grow around the world we will see more and more of that in every region. But we do see some of that proportionate to where our Express customers are today in all regions of the world.

I think also just to add to that it is obviously extremely early to see what we can do with Video.js as a funnel into Express itself. So we are looking at continuing to expand at the top of the funnel; that is a new way for us to do that cost effectively. We did note there is 24,000 websites, including some fantastic brands, using Video.js.

Obviously, as that strategy progresses and evolves and we start to see material metrics from that we will be happy to share those as well.

Well, Jeremy, on that front I guess you are reading my mind or reading my script for questions because my second question was related to Zencoder. In the press release it talks about this could create new opportunities, Zencoder could, for accelerating customer acquisition. So let's call it opportunities to add your funnel.

On the Zencoder front, is the open source video player likely a more actionable near-term customer acquisition opportunity as opposed to the encoding technology customer base?

We think about both as obviously attractive for a customer acquisition. I think the Video.js piece is clearly attractive for getting into Express and other customer relationships. Zencoder does bring 1,000 customers of its cloud encoding service.

Those are distributed across all types of organizations, sizes, sub-organizations. There is actually very little overlap in those 1,000 customers with Brightcove Video Cloud today. So there is absolutely an opportunity with the installed base. That business is having good growth; Chris gave some indications of what that looks like.

We see that as an absolutely very real opportunity. We have talked a lot, obviously, with the analyst community, investment community about do-it-yourself as one of the primary alternatives for how people do online video. Cloud encoding is a key part of do-it-yourself, so in a sense we are putting a feeler out into that market to capture people as they are getting started building stuff themselves and then grow them into customers that might use a broader suite of services from us.

And we think that this model of affordable self-service, adoptable API services for developers is a great way for us to create another significant on-ramp into our business. And so we do absolutely see that as an opportunity and we see an opportunity to offer the Zencoder product to enterprise clients directly as well.

Let me just add a little bit there on the Zencoder business, the commercial business with the encoding product. Just to give you a little bit more of a flavor on what the business model is like, a lot of the business looks a lot like Express in terms of the size of the customer.

It is a really low friction business. Customers can come in, try the product for free, and then adopt it in a self-service manner. That is a lot like our Express business.

Many of them will come in at the sub-$100 range and use it as a utility. And that is a little bit of a different model where there is a utility model where they can sort of go on a pay-go basis, on a usage model as well as a subscription model, which is more like our Express and our online video platform model where they can adopt -- where they buy a set amount of capacity over time and they use that up over the course of a year. So it is important to understand the characteristics of that.

Okay. Maybe just real quick and then I will stop. Chris, maybe a hard question for you; I will save the hard one for you. You talked about on a full-year basis in 2012 about $2 million in revenue from Zencoder and then it should at least double, so let's just say $4 million next year for my simple math.

How much revenue synergies would you bake in or would be baked into that comment in terms of you all creating those customer acquisitions opportunities and revenue synergies as opposed to just what is baked in on their own momentum and what they had going on? Thank you.

I haven't broken it out in models for tonight between what we would derive coming from, say, our sales force or our customers compared to what they are doing today. But if it is $2 million this year and we do expect it to double next year.

Robert Breza, RBC Capital Markets.

Thanks for taking my questions; most of them have been answered. But maybe Jeremy or David, as you guys look at the non-media business are you seeing any discernible trends relative to either vertical markets by geography or --?

Just trying to understand the trends that are affecting that portion of the business, because it seems to obviously be taking off. Just trying to identify what you're seeing maybe either across the whole world or maybe by geography. Any color would be helpful thanks.

Sure. There is not a lot to tell you about geography. We definitely focus on this segment in every region of the world. It has always been strong for us relatively in Japan actually, but other than that I would say it is pretty steady around the world, the non-media sector.

In terms of verticals, again it is very, very horizontal. Every kind of company in the world values and can use video. We tend to see a lot of business, particularly in the technology space. We got a lot of great companies in tech, we have a lot of great consumer brands, and within that I would say things like fashion and people who are trying to appeal to consumers.

And then financial service has also been a very strong sector for us and we do well there. So those are three that we put quite a bit of focus into and we have had a good return.

The last one I would mention is what we tend to call mission-based organizations. This is a combination of faith-based organizations, large churches and religious organizations, as well as government institutions. Examples in our case could range from a large organization like the Mormon Church or the US Department of State. And that has also been a good segment for us.

So we find institutions that either want to express their brand or communicate a message. And we also -- institutions that have money to spend, so financial services has been good for us as well.

Great, thank you. Nice quarter.

Thank you.

We have no further questions in queue at this time. I would like to turn the floor back over to Mr. Allaire for closing remarks.

Thank you very much. As noted, we are very pleased with the quarter; we are very pleased with the results on a whole. Excited about the Zencoder opportunity. We think this is going to be a great catalyst for the business in a number of ways.

And will look forward to engaging with and speaking with you guys in the upcoming quarter as well. Thank you very much.

Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.