Brightcove Inc (BCOV) 2012 Q4 法說會逐字稿

Greetings, and welcome to the Brightcove Fourth 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 of ICR. Thank you. Mr. Denyeau. You may begin.

Good afternoon and welcome to Brightcove's fourth quarter 2012 earnings call. Here to discuss our fourth quarter and full-year performance are Jeremy Allaire, Brightcove's Chairman and Chief Executive Officer; David Mendels, the President and Chief Operating Officer; and Chris Menard, Brightcove's Chief Financial Officer. Jeremy, David and Chris will be making a few comments, and then we'll open up things to your questions.

Now let me cover the Safe Harbor. During the call we will make statements related to our business that may be considered forward-looking, including statements concerning our financial guidance for the first fiscal quarter of 2013 and the full-year of 2013, our position to execute on our growth strategy, our ability to expand our leadership position and the ability to maintain existing and acquiring new customers and our ability to execute on our executive transition plans.

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 material risks and other important factors that could affect our actual results, please refer to the more detailed discussions contained in our SEC filings, including our most recent quarterly report, particularly under the heading Risk Factors. Also, during the course of today's call we will refer to certain non-GAAP financial measures. There's a reconciliation schedule showing GAAP versus non-GAAP results and guidance currently available in our earnings press release issued after the close of market today.

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 fourth quarter results, which were highlighted by revenue of $24.3 million, a growth 31% on a year-over-year basis. In addition, we achieved our goal of generating positive quarterly free cash flow for the first time in Brightcove's history. We are pleased that the Company exceeded our top and bottom-line guidance for the third consecutive quarter as a public company, which is a solid performance in light of the global economy.

2012 was an exciting year for Brightcove starting with our IPO in February. We added over 1,000 video cloud customers over the course of the year, spanning a wide range of verticals and customer sizes, including some of the world's largest media organizations.

We also expanded our value proposition with the acquisition of Zencoder, which has dramatically improved video cloud's encoding functionality and also represents Brightcove's initial move into selling discrete functional utilities. We have been extremely happy with customers' reaction to this acquisition and are seeing good sales activity for the standalones and their technology, including multiple six-figure transactions since the deal was closed.

2012 also saw a continuation of the trend Brightcove has focused on since the Company was founded in 2004, including the continued proliferation of digital content consumption on an ever increasing number of form factors across ever improving Internet and mobile data connections.

For example, according to the well-known internet analyst, Mary Meeker, mobile devices now account for 13% of worldwide Internet traffic, more than tripling from 4% in 2010. In addition, her research shows that 29% of US adults own a tablet or an e-reader, form factors that did not even exist 5 years ago.

We believe the rapidly increasing complexity of the consumer technology market represents a tremendous opportunity for Brightcove. And organizations of all sizes and across all vertical markets recognize that they must change the way they engage with their customers to reflect the new ways in which they are consuming information.

And the data from Mary Meeker and other industry analysts demonstrate the shift to our mobile devices is more rapid than any other technology shift we've ever seen before. Companies are increasingly recognizing that utilizing a third-party cloud content services provider is the fastest, most cost-effective way to navigate this quickly evolving technology environment as they scramble to catch up.

We believe that Brightcove is uniquely positioned to benefit from this migration to third-party cloud content service providers based on the fact that we are the inventor of the online video platform market and we offer the most complete solution. Our market-leading technology was recently recognized by two of the industry's leading third party research firms, Frost and Sullivan and ABI Research, for having the most innovative and advanced OVP on the market.

In particular, both Frost and Sullivan and ABI recognized Brightcove's combination of innovation and ability to execute, which is essential when you are helping some of the world's largest media companies and brands manage their online digital content presence.

Before I turn the call over, I wanted to also note that we announced the 2013 executive transition plan as part of our overall news release today. At the conclusion of the first quarter, David Mendels will transition into the role of Brightcove's CEO, after which I will assume the role of executive chairman.

Most of you have already gotten to know David over the past year as our president and COO, and he has done an extraordinary job overseeing our sales, marketing and product development functions since he joined Brightcove in 2010.

His impressive pedigree, including running a $1 billion line of business, and as part of Adobe, more than 10 years of experience before that at Macromedia, where he had successive executive roles including sales, marketing, business development, corporate strategy and as a general manager and executive vice president of product for the company's Web publishing business unit.

As we look to cross the $100 million in revenue mark during 2013, David has the perfect skill-set to take Brightcove to the next level, and I'd like to congratulate him on this well-earned promotion. As for me, I will be committed to Brightcove and plan on remaining active within the organization as executive chairman. I will continue to be involved with strategic planning and product development, as well as certain key customer relationships.

Given the close personal and working relationship David and I have and his deep familiarity with the company, I fully expect a seamless leadership transition over the coming months.

We also announced today that Jim Breyer has stepped down from our board of directors to pursue other activities. Jim has been a great broad member for the past eight years and I would like to thank him for his contribution. David Orfao will be taking over the role of nominating and core governance committee chair and we have started a search for a new board member.

I am extremely proud of the company that we have built over the past eight years and I am highly confident that the Company's best days lie ahead. With that, let me turn the call over to David.

Thanks for those kind words. I am excited to follow in Jeremy's footsteps as CEO and to lead Brightcove as we capitalize on the tremendous opportunity that is within our sight. We made significant progress against our long-term growth strategy during 2012 and we are focused on building on that success in 2013 and beyond. I look forward to working with Jeremy during this transition process and continuing to leverage his knowledge as he becomes our executive chairman.

I would like to take a few minutes to review some highlights from the fourth quarter, as well as some additional recent product announcements. In the fourth quarter, we continued to expand our customer base, ending the fourth quarter with 6,367 customers, a 64% increase compared to the end of 2011. Breaking this down further, we ended the quarter with 1,625 premium customers, an increase of 52 customers from the end of last quarter, and 4,742 volume customers, up 172 sequentially.

As a reminder, premium consists of our traditional premium video cloud customers, the enterprise edition of app cloud and Zencoder customers on annual contracts. And volumes include our video cloud express customers, the professional edition of app cloud and all month-to-month and pay-as-you-go Zencoder customers.

During the quarter, we added new customers across a wide variety of industries and verticals. For example, we had sales in the insurance industry with Allstate and Aflac. We also continue to have success in the life sciences segment, adding Bristol Meyers Squibb, Johnson & Johnson and Merck Sharp & Dohme. In addition, great educational institutions such as Georgetown University and the Said School of Business at Oxford University also became customers.

From a new sales perspective we were pleased to see larger transaction sizes during the quarter, including some of the largest in the history of Brightcove. It is also worth pointing out that as we start to sign large media organizations like Viacom and NBC, the signing of additional properties inside those companies which requires a significant sales effort, are not reflected in our net customer adds metrics. That being said, going forward we expect to see improvements in our premium customer add metrics as the sales resources we added in the second half of 2012 become productive.

In addition to growing the number of gross adds, we believe that we have the opportunity to improve our retention rates at the low end of the premium market where customers are smaller and tend to have less sophisticated internal IT resources. In order to realize this potential, we are adding resources to further improve our customer on-boarding experience and help customers integrate best practices to ensure they are successful with their video cloud deployment.

In the volume business, our net adds were lower than recent quarters, but similar to the trends we saw last year during the fourth quarter. Also, as part of our strategic planning process for 2013, we made the decision to reallocate some of our marketing investments into the premium side of the business. At the end of the day, the primary purpose of video cloud express is to serve as a feeder for our premium business.

We are looking at the best way to invest money into various sales and marketing programs to get the best return on our investment, and at the moment we believe we can get the best return through our premium sales force and related marketing efforts, so we will continue to have a diversified go to market strategy that flexes over time based on market opportunity.

We still see significant opportunity in upgrading volume customers to premium, and we had more than 40 of these upgrades in the fourth quarter and a little over 160 for the full year. This is a 25% increase year-over-year.

With Zencoder, we are pleased with the market reaction we are seeing and the traction we are getting with premium customers. The pipeline of five and six-figure deals is growing nicely, and we signed several of these larger deals during the quarter. The ability to cost effectively encode large quantities of digital content is a growing problem across a number of verticals and use cases, and we believe there is a meaningful market opportunity for the Zencoder set solution.

The fourth quarter also saw some exciting product announcements that highlight the benefit customers realize by leveraging our substantial R&D investments. The Windows 8 and Internet Explorer 10 began shipping in the fourth quarter. It included significant changes in the way video is handled by Windows.

By default, Web videos that worked perfectly on prior versions of Windows stopped working on Windows 8 unless the website owner made code changes or went through a special process to have their site white-listed by Microsoft. However, Brightcove video cloud customers generally did not have to make any changes to make the sites work with Windows 8.

We were able to make back-end changes that automatically updated the video players embedded in millions of Web pages in advance so everything works flawlessly on day one of the Windows 8 launch. Customers who relied on home-grown video technology were not so fortunate. They found themselves with unexpected, urgent and complex IT projects on their head.

During the quarter, we also released support for mid-roll advertising within our HTML5 player, enabling us to support pre-roll, mid-roll, and post-roll ads on mobile devices. This new technology is important for customers looking to monetize long-form content. In addition, we released support for DoubleClick's new version of their video advertising FDK. According to Google site, we are the only OVP to support it across all three platforms and no other OVP supports more than one.

As we enter 2013, we believe the investments we have made in our product offerings have positioned Brightcove as the clear leader and strategic vendor of choice in the cloud content delivery market. We believe Brightcove is very well positioned to be one of the primary beneficiaries of the secular shift to digital content.

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 fourth quarter revenue and operating results, which exceeded our guidance in both the top and bottom line. For the fourth quarter, total revenue was $24.3 million, a 31% increase from $18.5 million in the fourth quarter of 2011 and ahead of our guidance of $22.8 million to $23.3 million.

Subscription and support revenue of $23.2 million was up 34% year-over-year and drove the upside in the quarter. Professional services and other revenue was $1.1 million and slightly less than fourth quarter of 2011.

Turning to revenue mix, our premium offerings generated $21.8 million of total revenue, representing 29% year-over-year increase, while our volume offering generated $2.5 million in revenue, a 53% increase from the fourth quarter of 2011.

On a geographic basis, we generated $15.6 million of revenue in North America for the quarter, which was up 29% year-over-year and represented 64% of our total revenue. Europe recorded $5.6 million, a 33% increase and 23% of total revenue, while Japan and Asia-Pac generated $3.1 million of revenue for the quarter, up 35% year-over-year and representing 13% of total revenue.

From a vertical perspective, non-media customers represent 60% of our fourth quarter revenue and grew 43% on a year-over-year basis, while our media customers represent 40% of our revenue and grew 17% on a year-over-year basis. We continue to see a very broad, horizontal market opportunity and expect our industry mix to become increasingly diverse over time.

Our year-to-date average monthly video streams as of December 31 were 699 million, which was up from 651 million at the end of the third quarter. Excluding the impact of AOL as we've done throughout 2012, our average monthly video streams was up 14% on a year-over-year basis. We saw strong stream activity in the fourth quarter due to a number of significant news events during the quarter, including the US presidential election and Hurricane Sandy. 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.

Our recurring dollar retention rate was 89% for the quarter, which was lower than we have seen in recent quarters. There were two unusual events in the quarter that led to a lower performance. First, a couple of large customers that were scheduled to renew in December actually did so in January. That represented three percentage points of retention for the fourth quarter.

Second, we had a media company customer in the Asia-Pacific region who had trouble securing funding and could no longer afford their contract, resulting in a 2% reduction in the retention rate. We anticipate our recurring dollar retention rate to return to above 90% going forward.

Moving down to P&L, our non-GAAP gross profit in the fourth quarter was $17.1 million, a 32% increase from a year-ago and a gross margin of 70%. Subscription and support revenue represented approximately 95% of our total revenue and had a 74% gross margin, while services revenue represented approximately 5% of our total revenue and a negative 11% gross margin. We expect to realize additional gross margin expansion over time due to the inherent leverage in our lateral subscription model.

Non-GAAP loss from operations was $1.4 million in the fourth quarter, an improvement compared to a loss of $2.2 million in the fourth quarter of 2011 and better than our guidance of a non-GAAP operating loss of $1.9 million to $2.2 million.

Non-GAAP net loss per share was $0.05 based on 27.9 million weighted average shares outstanding. That's in our guidance of a loss of $0.07 to $0.08 per share. This also compares to a per share loss of $0.53 on 5.1 million weighted average shares in the year ago period. On a GAAP basis our gross profit was $16.7 million. Operating loss was $4.6 million and our net loss per share was $0.17.

Quickly reviewing our full year of 2012 results, total revenue was $88 million, which grew 38% year-over-year. Non-GAAP gross profit was $61.2 million. Non-GAAP loss from operations was $7.1 million and non-GAAP loss per share was $0.34 on 24.6 million of weighted average shares outstanding.

Turning to the balance sheet, we ended the quarter with cash, cash equivalents and investments of $33 million, which was an increase from $30.8 million on December 30th. Subsequent to the end of the quarter, we spent $1.1 million to purchase the remaining 37% of our Japanese joint venture.

From a cash flow perspective, we generated $2.7 million in cash from operations and invested $200,000 in capital expenditures during the quarter, which equates to a positive free cash flow of $2.5 million for the quarter. This compares to a negative $100,000 in the year-ago period. We are pleased with our ability to (inaudible) for generating free cash flow in the fourth quarter.

For the full year, free cash flow was negative $7.5 million, a significant improvement from the negative $11.6 million in 2011. Our deferred revenue balance at quarter-end was $19.2 million, up 40% year-over-year.

Finally, I'd like to provide our financial outlook for fiscal year 2013 and the first quarter. For the full year 2013, we're targeting revenue in the range of $102 million to $105 million, which represents a year-over year growth of 16% to 19%. We are targeting a non-GAAP loss of $4.5 million to $6.5 million. We continue to expect that we will generate a non-GAAP operating profit in the fourth quarter of 2013.

Non-GAAP net loss per share is forecasted to be between $0.18 to $0.25 for the full year 2013 based on 28.4 million weighted average shares outstanding. We are targeting free cash flow of between $1 million and $3 million for the full year. While we expect to generate free cash flow for the full year, free cash flow will be negative in the first quarter due to the timing of bonus and yearend commission payments, as well as the timing of capital purchases.

For the first quarter, we are targeting revenue of $23.5 million to $24 million, or 18% to 21% growth on a year-over-year basis. We expect professional services to contribute approximately $700,000 of revenue within the quarter.

From a profitability perspective we expect a non-GAAP operating loss of $2 million to $2.3 million in the first quarter. We expect a non-GAAP net loss per share of $0.08 to $0.10 based on 28 million of weighted average shares outstanding.

In summary, we are pleased with our fourth quarter and fiscal year 2012 results, and we believe we are well positioned as we head into 2013. Brightcove has positioned itself to be the market leader in the emerging multi-billion dollar market opportunity and we are focused on capitalizing on the opportunity in 2013 and beyond.

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

Thank you. We will now be conducting the question-and-answer session. (Operator Instructions). Our first question comes from the line of Tom Roderick with Stifel Nicolaus. Please proceed with the question.

Hi guys, good afternoon. It's first off I'll start by saying that, David, congratulations, Jeremy congrats to you on moving on and that's logically and the next step. So I'll start there, and maybe in conjunction with that for the question of both of you.

As you look at how to sort of take this company to the next step and where you want to sort of deploy your resources, can you talk a little bit more in-depth regarding how you want to build out the sales force, seems like that was one where the sales hires have been flattish for awhile. And what do you think sort of needs to happen to reinvigorate to that adds on the premium side of the business? Thanks.

Hi. This is David. So first of all, thank you very much. It's a very exciting time and thank you too very much for your kind words. We are continuing to invest at sales and marketing. We are adding about 15% to 20% more on, I'm sorry, on quota carrying sales heads for next year. We're very excited about that.

That's going to be a mix of people that are focused our installed base. So the account managers continue to grow existing customers and also go after new customers. As we look at focusing the business and reinvigorating growth, a key theme for us is going after some of the larger opportunities in the market.

As we have been talking about some time we do see a bit of a turning point as more and more of the largest companies in the world that might have started with DIY strategy, a do it yourself strategy of building their own technology stack in the space five to 10 years ago, are starting to realize, my god, with all the fragmentation in the market and the new devices it's really hard to do that. And it's a great opportunity to outsource and come to a company like Brightcove.

So we are seeing a lot of opportunity at the high end of the market. We are investing more in our media vertical sales team, and more in going after those large deals. And we think there is still a ton of opportunity in front of us. And we are as excited as we've ever been about the market.

This is Jeremy, and thanks for the kind words as well. I just want to layer on top of that, just I think when I and we look at the market opportunity here we know we're still very early in the long-term of the development of this market. And we talk about the percentage of time that people consume video through traditional television distribution and the percentage of time that they are spending with online video today, and it's still in the low single digits the amount of time people are spending online.

We are right on the cusp of a transformation where online video reaches over the top directly into living rooms through smart TV platforms. And we think that as that takes place every major broadcasting company in the world and premium media company in the world is going to need to be part of that shift. And that shift to viewership from offline broadcast to online is going to take place in the coming years and to underscore David, we're very focused on ensuring that we remain the clear market leader in the top tier of the premium media space.

Okay, great guys. Thanks. And then let me follow up, Chris, with a follow-up for you if you don't mind. Just in looking at the EPS guidance, it came in a bit below relative to the full year in the first quarter below where we had modeled, and I had this treated model.

I am curious though relative to the full-year guidance, do you still think that it's possible to sort of see the Company turning the corners toward EPS profitability by the end of the year? Is that target kind of pushed out to 2014? How should we think about when do you turn the corner and what type of linearity we ought to see in that profitability ramp?

That's right, a good question, Tom. We're targeting to be non-GAAP op income positive in the fourth quarter. And so you're going to see a steady path of profitability throughout the year.

Excellent. Thank you, guys.

Our next question comes from the line of Terry Tillman with Raymond James Financial. Please proceed with your question.

Yes. Thanks, guys, and echo congratulations as well in terms of the promotions and changes in roles. Question, Chris, actually relates to the revenue outlook for the year. It looks a little lower than my model as well as I guess the Street.

You talked about some puts and takes in terms of a couple of delays in renewals, sounds like maybe some larger customer renewals. And also you're talking about a little bit of a targeted shift more towards allocating dollars to premium investments. Are those some of the drivers for the top line you're talking about, or do they impact some of your top-line expectations for '13? Or is there anything in your guidance that speaks of macroeconomic challenges flat or maybe more challenging? Thank you.

Yes good, Terry. You had a lot of questions in there, so I am going to go one by one. To the first one in regards to the revenue retention rate, we had a couple large customers who were up for renewal in December and they just slipped by a couple of weeks. So at this point they have renewed. They renewed in January. So that has no effect on the guidance at all. It was just timing in terms of the revenue retention rate.

The second question I think had to do with the allocation of marketing spend. We are going to put more money into marketing on the premium side of the business just because of the bigger customers and bigger dollars. It's not a huge switch or a big change. To put it in perspective, we are moving a couple hundred thousand per quarter out of the volume side of marketing into the premium side.

Again, I don't think it's a big change in terms of the overall marketing plan per se, and it's not going to make a big change in the guidance. We are using the same methodology we have used throughout 2012 in terms of our forecasting methodology and it's the guidance that we have today. As you know we call what we think we can hit and what we can see and we are sticking with that.

Okay. Thanks for that. And I guess on the Zencoder front, I know it's part of your product portfolio now, so trying to delineate it's not as easy, but you did say exiting 2012 that I think the belief was that you could probably at least double that business to four or so million dollar run rate. Is that still on the table?

Yeah, absolutely. We are still really excited about Zencoder. We're doing really well. We have said in the opening remarks we've had multiple six figure deals, more than a couple handfuls of five figure deals, and we are on track with the numbers that we presented when we announced the deal back in July.

It does get it harder over time to delineate between video cloud and Zencoder because we are starting to sell joint deals, and so it becomes a game of allocations. And because some of the deals that we are selling now, the Zencoder they probably wouldn't be able to sell on their own, just because they are getting tied into video cloud and tied into our sales engine that we are winning those deals, but overall we are really excited.

And my last question just relates -- it's for either Jeremy or David, talking about this do it yourself or DIY market it seems like that's really key element for a sustained growth going forward. Are you seeing -- it sounds like you are feeling more comfortable about the opportunity there and it's exciting, but are you actually seeing where, yes, they are adopting tools but it's not necessarily the entire video cloud platform.

They are just much more willing to buy pieces of your technology, so going forward we're going to see more of this modular type sale where it's either DRM, or advertising or analytics. Could you maybe talk about exactly what you're seeing with the DIY? Thanks.

Sure. That's a great question and it shows a lot of insight into really where the market is. I think you've hit upon the key theme for us. Certainly we do see an opportunity for the full video cloud suite and that we've had a lot of success with that with some of the major media companies. We've announced in last year companies like Viacom, companies like NBC.

We see new divisions of those companies join us over the last quarter as well, which is exciting, but your point is a good one, which is ties into the strategy we rolled out around the time that we announced the acquisition of Zencoder, which is that these customers have very broad and diverse needs and a wide range of aspects of the online publishing space, and so being able to offer what we would call platform as a service, so enabling customers to adopt access of the product.

For example, through Zencoder the transporting functionality on a utility basis is very, very compelling, and so we see a lot of opportunities for that. It's definitely something you will see more from us. It's not something that is a material part of anything we are announcing today, but it's a general trend that we would like to be able to expose more and more of the functionality video cloud on an a la carte basis in order to have new ways of customers adopting it and fitting it into different kinds of workloads.

Our next question comes from the line of Jennifer Johnson-Lowe with Morgan Stanley. Please proceed with your question.

Hey guys. This is actually Jon Parker calling in for Jennifer. I will echo my congratulations on some of the new roles and opportunities as well going forward. First, I just wanted to dig in a little bit to the customer add number again. You guys sort of alluded to that the premium adds might have come in a little bit lighter than we've seen in the recent quarters, and I am trying to wonder how much of that is related to some of the sales transitions that you guys discussed last quarter or other factors in the market like competitive environment, the macro or something else.

Then maybe along those lines, where do you think we are in the productivity curve for some of those hires, as well as the sort of vertically focused media team you guys talked a little bit about last quarter, and how should we think about that ramping into calendar '13?

Sure, good question. It's Dave Mendels. Thank you as well. First of all, please keep in mind that number is a net number, not a gross number, and that's just important to keep in mind that there were more gross adds during the quarter, but there is also some churn, as there always is during the quarter.

We're not seeing any fundamental trend on the competitive side. We continue to have competition from a number of different companies, but no one competitor or any fundamental competitive trend that is different from previous quarters. We're also not seeing any fundamental change in the macroeconomic condition, although certainly there are some countries maybe in southern Europe for example that are doing worse than in other countries.

I think we have seen a couple of things. One is we did have more larger deals. If you look year-on-year, our average license revenue per premium customer did increase year-on-year by 4%, but some of those big deals did come in Q4, in fact some of the larger deals in the Company history, so you do have a bit of a trade-off there with larger deals but smaller number of deals.

And similar to that, as you know, a lot of our sales and marketing activity goes against existing customers. So for example, we mentioned in previous quarters doing business with parts of NBC Universal. Last quarter we did business with Telemundo, which is part of NBC Universal, but that won't go up as the new customer adds that although it is a significant important customer for us and quite a bit of work to go after. So there are some variable there that help mask some of what's going on.

In terms of the new sales reps, I think it's a valid question and I think we are still ramping some salespeople. We will see continued productivity, especially as we go after larger deals and deals in the media sector. Some of those deals take a longer time and it can take a longer time when you are ramping a new sales rep, so there is some of that factor in here, and I think we'll see continued improvement in that regard over the year.

Okay thanks. That's helpful. And, Chris, maybe to you on the guide again, it does seem to imply a sequential decline which you really haven't seen before. And I am wondering obviously [pardentially] and I'm guessing to the customer loss then and in Asia, but even adjusting for that it seems like the guides are going to be about flat growth. So I am wondering is there anything else that we should be thinking about, how much that's tied to the customer adds in the quarter versus you may be higher than normal overage levels from Q4. Is there anything else that we should be aware of in the guidance from Q1?

Yes. I think one of the things I tried to put in the prepared remarks and maybe it wasn't clear is I am expecting the professional services revenue to dip in the first quarter. So I am expecting about 700K of professional services down from just over 1.1 million in Q4.

Okay. And then maybe my last question either for Dave or Jeremy about on the competitive front, and I'm what I am wondering a little about is and maybe Amazon is a competitor. They have been in the CDN end market for a little while, now cloud front, and they just announced their own elastic transcoder server would seem to be competitive with Zencoder on the surface.

So on the one hand it seems like a potential opportunity for you guys given their ability to broaden the increased awareness for these types of products, but on the other obviously they are pretty aggressive with price. So I am kind of curious to how do you think about any potential impact to Zencoder in the near term and maybe as your broader platform longer term? Thanks.

So and so good question and good point by the way. We do believe that when you see large companies enter a market it helps validate that there is a large market. And so we have always said that we anticipate in the long term we will compete with larger companies because we're going after a large market. And so we view that as validation.

It's important to note that the new Amazon offering is indeed competitive with Zencoder and I'll talk about that in a second, but it's not broadly competitive with our core business which is the video cloud offering, which is a complete end-to-end suite for video publishing. And so while there has been diagram overlap with us, they are not sort of a direct head-to-head competitor for us for most of our business by any means.

As it relates to Zencoder, we think we have an incredibly competitive offering. We have done initial review of what Amazon has released and we don't believe that today it is competitive from a features, a quality, a performance standpoint. That doesn't mean that we don't take it very seriously. Amazon has a track record of releasing products and then improving them over time, and so we will continue to improve ours over time, but we feel very good about our position.

From a pricing perspective we feel like our pricing turns out to be very competitive as well. And so we think we are in a very strong position still. They are validating the need to look at cloud solutions for transcoding, and that's a really fundamental transformation because the primary competition in this space is people that in buying hardware and software and installing and managing that on premise. And so I think all in all it represents an opportunity.

Great. Thanks a lot, guys, and good luck.

Thank you.

Our next question comes from the line of Brendan Barnicle with Pacific Crest Securities. Please proceed with your question.

Thanks so much, and congratulations on the move, guys. Dave, I was just going to follow up on two product announcements that you guys made last quarter and you've alluded to some of Zencoder generally, but specifically Zencoder live transcoding, which I think was discussed in some of your last answer, as well as Zencoder instant play, if there is any update on those new products and how those releases are going.

Well and let me focus in for a second on the Zencoder live transcoding. We are really excited about this offering. It is tying back to the previous questions one more point of differentiation where we are out ahead of the market, we are out ahead of folks like Amazon that are trying to enter the market, for example.

We feel really good about it. We have entered what we are calling limited commercial availability, which is it's a brief precursor to general availability which will be this quarter. We feel really good about the product itself, the really fundamental business and economic problems of customers that want to distribute really high quality, live broadcast of events around the world to multiple devices in multiple formats over live streaming.

We've gotten very good feedback on the availability program. We do have early customers of that commercial program. In fact, we mentioned one of largest deals in the Company's history last quarter. This was one of the products that they bought from us, and so we're very excited about the early pick up and feedback, and we expect to have a good launch this quarter and continue to grow customers there.

On the instant play side that's still very early. We have some customers using it. It's not fully integrated through as a video cloud product yet. That's something we're still working on. It's available standalone, but as part of the video cloud service we think there will be a lot of uptick, especially among our many news customers. We have many newspapers, and mini-broadcasters and weather companies that use video cloud, and we see a lot of interest in that high-performance instant delivery that's possible now. And so over the course of year we think that will be a very important part of how we differentiate.

That leads to my second question around the media side where we saw the media business increase as a percentage of business during the quarter. That was kind of surprising to me given the move to more diversification. Any other color around why you had that sort of a change?

Well, let's just start by saying we continue to believe in a horizontal diversified market, and there are more non-media companies in the world than media companies. So we continue to expect to see success across the broad. We believe that video is a first-class citizen, if you will, on the Web and that every major company, every major brand, every major media company needs to solve this problem of how do they distribute their content across all of these devices to their audiences, and their stakeholders, and their employees, and their citizens and the like. So that continues to be the case.

I think you will see some lumpiness in that some of the media companies tend to be very large. They do have more video and so they tend to be larger deals. They also went through a cycle where many of them invested very heavily in DIY, building engineering teams and software stacks on their own to try and solve this problem. And now some of them are, and many of them in fact are hitting that tipping point where they are saying why we are doing this on our own.

And so we do think there is a big opportunity to get some of those larger customers, and we are working very hard on that and we've had some success. And so you will see some swings because of that, but overall in a long-term trend you will see us continue to be very, very diversified. And you hand this to Chris for a sec.

And I think what you saw in the percentages for the fourth quarter some of the big media names we announced in the last conference call started to generate revenue, and so it shifted those percentages a little bit.

Great, no that makes sense. And then, Chris, just one for you, as we think about free cash flow and you talked about sort of the past profitability continuing through the year, should we be thinking about free cash flow the same way and could you give us any more color on maybe what quarter we might expect to see another return to profit in free cash flow?

Sure yeah. I do think we will -- we won't generate free cash flow in the first quarter. I think all the other quarters after that we will generate free cash flow. As I said in the prepared remarks it's somewhere between $1 and $3 million for the year, so there is couple of quarters where we're just going to kind of hover, but we should be on the plus side. CapEx next year should be similar between $5 million and $6 million for the year as you're thinking about your models.

Terrific, really helpful. Thanks, guys.

Thanks.

Our next question comes from Sameet Sinha with B. Riley & Co. Please proceed with your question.

Yes. Thank you very much, a couple of questions here. So in terms of professional services, should we resume a similar sort of a trend that as your larger media companies, the larger media wins, professional services should continue to grow accordingly?

And my second question was in terms of growth rates for your as for your 2013 guidance that's half of what you did in 2012. Does that indicate any sort of -- has it changed the visibility you have into your revenues? Obviously we are seeing different trends between medium, or premium and social volume customers.

And the final question is these two new renewals that you had in January, to the extent you can talk about the renewal economics in terms of unit pricing, did the contract size go up? What about unit pricing? Did they buy any additional products. That would be really helpful. Thank you.

Sure. So the first question was in regard to pro serv. Just a reminder, pro serv revenue can be very lumpy. It depends on the timing of the projects, when we complete them or the percent complete in any given quarter. As I look at the 2013 I think the percentage of revenue it's going to come, pro serv is going to be in the neighborhood of about 5%.

The second question I think had to do with the visibility. Our visibility is unchanged compared to what we've seen in previous years. If I look at the combination of our backlog and the renewals, and we always take the renewals and kind of haircut them back to historical rates, we still have visibility into just over 70% of the revenue that we are targeting for 2013 and over 90% visibility into the first quarter.

I think the third question had to deal with the two renewals that kind of fell out of December and we closed them in early January. I really can't comment on the pricing of two individual deals. They are both premium customers and while they were important deals, they are two of over 1,600 premium customers, and they were just normal renewals that closed a week or two late.

Thank you.

Our next question comes from the line of Steve Frankel with Dougherty & Company. Please proceed with your question.

Hey, good afternoon. Could you start by giving us some color on app cloud, and how it did in the quarter and how you feel it's positioned for 2013?

Sure. This is David. I think that it's probably the best way to characterize it is we are still on a learning mode here. As you know, we released it and then in the middle of last year we did a bit of a pivot and we changed the model and the pricing. We're continuing to learn and work with customers.

There is a fundamental problem in the market that isn't just a app cloud problem, by the way. So [that's not] in the video cloud platform problem around how the people deliver these great content experiences across all of these different devices, and run times and form factors in the market.

And so this is a really important area for the Company, but specifically as it pertains to app cloud I think I would best characterize it as we continue to be in a learning mode. We continue to be in experimental mode trying to figure out the best approach here, but at the same time it's not a material part of our guidance for 2013.

Okay. And for Chris, could you characterize what overages were in the quarter and how we should think about it for Q1?

Sue. Overages have been really steady Q2, 3 and 4. And so we didn't see a big blip in the fourth quarter compared to the third quarter. And I think we are finally at a stage where I feel like we've hit this new normal. As I said throughout last year I was little concerned we were going to hit in this spike and we were going to come back down. So as I look at 2013 I am just assuming the same level of overages we saw in the back half of 2012.

Okay. And maybe some, David, some color on penetration of these [wheel] accounts. You talked about Telemundo, can you give us anymore insight to what's going on in some of these other large accounts?

I think we will continue to make announcements as we can make them certainly. So I am not sure there is much material insight I can give you. I think the general trend is when we have tried to talk about in the past, which is what we see is a lot companies that have hit a wall, if you will, where they invested in building out systems and then in many markets things get easier over time. This is a class of technology that's actually gotten harder over time as people have to figure out how to target video to all of these different devices, and runtimes and the like.

And there is a lot of layers to that from security protocol fragmenting, to streaming protocol fragmenting and so on. And so we've invested very heavily in solving those problems. And I think that makes us a much more attractive option to these larger companies. And so we have a great team of people that's focused on that and we have been having some good traction. We have mentioned some great brands in the last year, like NBC, and Viacom and Telemundo, And I think you will see more in 2013.

Okay great. Thank you.

Our next question comes from the line of Robert Breza with RBC Capital Markets. Please proceed with your question.

Hi. Thanks for taking my questions. Chris, just as you look at your revenue guidance out there, and maybe a follow up to the prior question, what may be (inaudible) in terms the low end of the guidance range to the high end, and how do you kind of factor it in your guidance relative to the new sales force or (inaudible)? Thanks.

Sure. It's a hard question to answer, but I can tell you that we haven't changed the methodology that we used in 2012 as we come into 2013. I think we've got a track record of coming in within the ranges we've given really performing, so no change in terms of methodology. I think we'll just have to continue to execute.

Thanks.

There are no further questions at this time. I would like to turn the floor back over to Jeremy Allaire for closing comments.

Thanks, everyone, appreciate the questions and I hope this was valuable. Obviously we're pleased with the results in Q4. We're very excited about 2013. We continue to see great product and market leadership for the Company. I am personally very excited about David's promotion and think that we're in a great place to continue to be the market leader here and continue to grow. And we'll look forward to further discussion throughout the quarter. Thank you.

This concludes today's teleconference. You may disconnect your lines this time. Thank you for your participation.