Brightcove Inc (BCOV) 2015 Q2 法說會逐字稿

Greetings, and welcome to the Brightcove second quarter 2015 earnings conference call. (Operator instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Brian Denyeau. Thank you, sir. You may begin.

Good afternoon. And welcome to Brightcove's second quarter 2015 earnings call. Today we'll be discussing results announced in our press release issued after market close today. With me on the call are David Mendels, Brightcove's Chief Executive Officer; and Kevin Rhodes, 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 2015 and the full year of 2015, expected profitability, our position to execute on our go-to-market and growth strategy, our ability to expand our leadership position, our ability to maintain and upsell existing customers, and our ability to 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 reflected upon 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 most recently filed Annual Report on Form 10-K as updated by our other SEC filings.

Also, during the course of today's call, we'll 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 market close today and can be found on our website at www.brightcove.com.

In terms of the agenda for today's call -- David will provide a summary review of our financial results, market opportunity; as well as an update on our operations. Kevin will then finish with additional details regarding our second quarter 2015 results, go over our guidance for the third quarter and full year 2015.

With that, let me turn the call over to David.

Thanks, Brian. And thanks to all of you for joining us today on our second quarter 2015 earnings call.

For the quarter, we generated positive adjusted EBITDA of $620,000 and a non-GAAP operating loss of $964,000, which were in line with our guidance. Total revenue was $32.8 million, which was $200,000 below our guidance range. Our revenue performance in the quarter was impacted by over $500,000 due to the timing of certain renewals that slipped out of the quarter.

This was purely a matter of timing. The revenue is not lost and will be recognized over the remainder of the customers' contracts. Kevin will provide additional details, but in short, we've already made process changes to ensure we don't face this type of short-term timing impact again.

From an operational perspective, we are seeing solid performance in North America, Asia Pacific and Japan. Our digital marketing group in North America had a very strong quarter that reflected improved demand that was highlighted by a higher take rate of our higher-priced offerings and more renewals that incorporated a meaningful upsell component.

In Japan, where three of the five major commercial broadcasters and three of the five of the top newspapers are using Brightcove, we had another strong quarter in our media business and have a healthy pipeline of opportunities we are working on in this increasingly important geography.

At the same time, our sales performance in Europe has lagged our expectations so far this year. We have already taken steps to address the execution issues in this region with the appointment of Andy Feinberg as our new President Of International Operations, where he has been cast with replicating the success he has overseen as head of Asia Pacific and Japan.

As the changes we're making in Europe will take time to have a positive impact on the business, we believe it is prudent to narrow our annual revenue outlook towards the midpoint of our previous range. Our guidance still calls for increased year-over-year growth rates in the second half of the year; however, we now expect to return to double-digit revenue growth next year. Most important in our view, we are seeing an increasing number of proof points that our strategy is starting to resonate in the market.

I'd like to take a few minutes to share thoughts on how the market is evolving in media companies and with digital marketers, and our progress in selling into these markets. In the media market, the pressure among publishers and broadcasters to expand audience reach and to unlock new monetization opportunities for their video content continues to increase. As a result, there is a tremendous amount of innovation and experimentation underway as companies test different business models and approaches to executing OTT services and next-generation ad insertion.

A key focus for Brightcove in the media market has been to help customers address these reach and monetization objectives by providing them with modular best-of-breed product offerings that can solve specific technical challenges and that, combined, provide technology solutions that solve specific business challenges.

A great example of this solution approach is our combination of Brightcove Once, our server-side ad insertion technology; and Perform, our player management server. In deploying this solution, customers are able to blend the benefits of seamless monetized video streams with the ads and content stitched together in the cloud with the benefits of client-side interactivity through Brightcove's market-leading web player and native player SDKs.

This Once and Perform solution enables our customers to optimize ad yield and ad experiences in a number of ways. Using the solution, customers can circumvent ad blockers, minimize error rates or breakage and ad delivery, especially in mobile environments; and can increase accessible inventory by improving yield in more challenging areas such as mid-rolls and overlays without compromising the TV-like quality of the viewing experience.

In the quarter, we worked with one of the largest US broadcasters to implement this solution and conduct AB testing on one of their properties. The results showed 50% to 100% revenue uplift from the solution through the mitigation of ad blockers alone.

An exciting early customer example for the integrated Once and Perform solution is Vox Media, which has quickly become one of America's foremost digital media publishing companies, with eight cutting-edge brands that span technology, lifestyle and business; and include titles such as The Verge, Polygon, SB Nation and, just recently, Re/code.

Vox approached us because it was suffering from brand and monetization issues due to poor player performance, primarily on mobile devices, with its previous vendor. Vox is one of the first customers deploying the Once and Perform solution with an initial rollout plan for the mobile web versions of its properties, which generate a significant percentage of Vox's traffic and video views. We're also seeing significant interest in this solution from other media customers as they look to preserve a high-quality end user experience while maximizing successful ad delivery.

In the second quarter, we signed new or expanded agreements with a number of media customers, including Barstool Sports, the Canadian Football League, Rogers Media, the Food Channel, Manchester City Football Club, News Corp Australia, the Pac 12 Conference, Vox Media, and Yelp, among others.

I'd like to share a little more color on a few of these examples on our success in media. Barstool Sports, a leading sports and men's lifestyle blog with more than five million monthly page views, selected Brightcove Video Cloud to replace its existing provider, which was struggling to execute mid-roll advertising on Barstool's daily rundown shows.

In very short order, our team was able to demonstrate the technological capability to deliver a great viewer experience, while maximizing Barstool's ad revenue. This is another example of the significant opportunities among new media companies that are being built from the ground up to attract and monetize significant audiences.

The Pac 12 Conference, whose Pac 12 Networks and Pac 12 Now TV Everywhere service reached more than 60 million viewers and carry 850 live sporting events, selected Zencoder to be its transcoding engine as part of its increasingly component-based video platform.

This win is an example of the value of investing to make our Video Cloud platform available on a modular basis, as we would have not been selected if we were only selling our full platform. Now we have a new client relationship to whom we can demonstrate the value of our products with the hope of selling additional services over time.

The challenges I noted earlier in Europe have impacted the performance of our global media business. Several of the economies in the region are relatively weak, which is making customers increasingly price-sensitive and deals more difficult to close.

At the same time, we are not executing as well as we would like and we need to improve the executing of our teams to get them on par with what we're seeing out of our other major regions. In North America, we are actively working to ramp the new salespeople we added during the first quarter.

Turning to the digital marketing business -- we are very pleased with our efforts from a product portfolio and go-to-market perspective, particularly in North America; and we're seeing improved customer attraction. International markets are taking a little longer to develop.

We believe we have successfully proved out that there is a significant market opportunity in digital marketing to be the best-of-breed video marketing solution as part of the emerging marketing cloud stack. Our focus now is on building on our recent success in order to increase the number of opportunities in this business.

One of the ways we're looking to do this is by partnering with leading cloud marketing automation companies, like Eloqua and Marketo. Our integration has now been certified by both Oracle and Marketo.

The customer feedback on our integrations and our go-to-market efforts with both companies have been very encouraging. There's tremendous market activity in the cloud marketing automation space, and I feel good about the progress we've made in getting Brightcove well-positioned in the market.

During the quarter, we signed new deals or upsells with a wide range of brands, including Aon, BassMasters, Blue Jeans Network, a cloud-based video collaboration services company; Bryant University, GoNoodle, an innovative software solution that helps teachers channel kids' classroom energy with deskside activities; Ingram Micro, Janssen Pharmaceuticals, Morningstar, Sotheby's, and Udemy, a marketplace for online learning, among others.

Let me highlight a few of these customer wins. Sotheby's, the internationally recognized auction house, is a great example of a customer who came onboard simply to host video and is now expanding its use case with Brightcove.

Sotheby's first became a customer in 2010 and in 2014 began to stream its live auctions in London and New York City. In 2015, live events are now a focused market initiative for Sotheby's as a means to extend its brand and showcase extraordinary auction items. We expect to continue to grow our business with Sotheby's in subsequent quarters as the company opens its doors to new audiences through video.

We're also seeing some exciting momentum with Video Marketing Suite and Gallery. Let me highlight a couple of examples. We upsold Janssen Pharmaceuticals, a Johnson & Johnson company, from Video Cloud to the Video Marketing Suite during the quarter.

Janssen was excited by the prospect of timed video analytics data to its instance of Oracle Eloqua to supercharge its lead nurturing and marketing campaigns, and have been part of our audience module beta program leading up to the product release. Janssen also saw additional value in utilizing Gallery for upcoming video-based sites to raise awareness of its expertise in digital research.

Aon, a global provider of risk management, insurance brokerage and outsourcing services, is another great digital marketing and enterprise success story and has been a long-time customer for external video use cases, and recently selected Brightcove for internal use as well. As part of this expanded use, Aon upgraded to Video Marketing Suite and has a major functionality release planned for later this year to provide video as a ubiquitous experience across their intranet, which has internal news, HR information and training content, with potential for live events or townhall type events as well.

In addition, some great wins -- we continue to make significant improvements to our products, most recently with the introduction of the new Brightcove Video Cloud. We have re-architected Video Cloud to dramatically simplify next generation online video distribution and publishing, with an elegant new HTML5 user interface, mobile publishing, faster speed and time-to-live, and new custom analytics that help customers understand the impact of their video content.

We also built the new Video Cloud entirely on the new APIs that make it significantly easier for customers to integrate components of our platform into their existing or custom architectures. We believe the new Video Cloud is a big step forward and furthers our leadership in the online video platform market.

In summary, we're continuing to make progress in positioning the Company for improved revenue growth. Our results in Q2 do not change our belief that our product portfolio and go-to-market focus on enabling customers to leverage video and to realize better business outcomes is the right one.

We still have more work to do to generate greater velocity and predictability in our sales, but I am confident the steps we're taking will improve growth and generate shareholder value over time. With that, let me turn the call over to Kevin to walk you through the numbers.

Thank you, David, and good afternoon, everyone.

As David mentioned, our results for the quarter are in line with our expectations from a profitability perspective, but revenue came in slightly below our guidance range. I'll begin by reviewing our financial results for the second quarter, and then I'll finish with guidance for the third quarter and an update for our outlook for 2015.

Our total revenue the second quarter was $32.8 million, up from $31 million in the second quarter of 2014 and below our guidance of $33 million to $33.5 million. The revenue underperformance in the quarter is due to the timing of renewals for certain customers. These customers' renewals slipped out of the second quarter and were renewed or extended in the first week of the third quarter.

Our revenue recognition policy dictates that we do not recognize revenue until renewal or extension is signed, and then the revenue catches up over the remainder of the contract. This is ultimately the case here as revenue will be recognized over the remainder of the customer contracts. Going forward, we've put a new procedure in place to ensure that this issue doesn't occur again.

Moving on to our revenue breakdown -- subscription and support revenue of $33.9 million was up 7% year over year and 10% on a constant currency basis. When excluding $0.8 million in revenue from Rovio in the year-ago quarter, our year-over-year subscriptions and support revenue was up 10% and 13% on a constant currency basis. As a reminder, this is the last full quarter impact from Rovio, as its contract expired at the end of August 2014.

Now, let me add some color around the revenue mix and the impact of foreign currency changes. In the second quarter, our premium offerings generated 93% of our total revenue, while our volume offerings generated 7% of total revenue.

On a geographic basis, we generated 64% of our revenue in North America during the quarter. Europe generated 20% of our revenue, and Japan and Asia-Pac generated the remaining 16% of our revenue during the quarter. Our North American, Japan and Asia-Pac geographies performed very well; however, Europe underperformed, as David outlined prior.

From a foreign currency perspective, we are estimating the second quarter and the full-year impact of changing currency rates on our revenue to be $1 million and $4 million, respectively, which represents a 3.3% drag on revenue on both a quarterly and full-year basis.

From a vertical perspective, our media business represented 46% of our revenue in the quarter. Our growth in the media business is being driven by our increased focus on the [smart] vertical, new product introductions we've made in recent quarters, and healthy demand in Japan and Asia-Pac.

Our digital marketing business represented 54% of our second quarter revenue. We're pleased with the progress we've made in this market, and the exciting wins that we signed in the second quarter further validate our strategy.

Let me now turn to the supplemental metrics that we share on a quarterly basis. Our reoccurring dollar retention rate in the second quarter was 88%, which compares to our target range in the low to mid 90s.

Our retention rate was negatively impacted by 300 basis points in the quarter due to the timing of the renewals that I referenced earlier. Foreign exchange rates continued to be a major headwind on our renewal rate, as our dollar retention rate was negatively impacted by additional 200 basis points due to year-over-year changes in foreign currency exchange rates.

Looking at our customer count -- we ended the second quarter with 5,404 customers, of which 1,847 are classified as premium customers. Our customer count performance was predominantly impacted by the aforementioned weakness in Europe.

Adding new customers is still a priority for our company, but our primary goal is for us to generate revenue growth, which in any given quarter may be skewed towards new customer additions or upsells into our installed base. Our average revenue per premium customer continued to increase during the quarter, which is a positive sign, and went up to $64,000 per year, which is up 7% year over year.

Moving down to P&L -- our non-GAAP gross profit in the second quarter was $21.9 million, up from $21.2 million in the year-ago period, and represents a gross margin of 67%. Subscription and support revenue represented approximately 97% of our total revenue and generated a 69% gross margin in the quarter.

Non-GAAP loss from operations was $964,000 in the second quarter, compared to a loss of $1.1 million in the second quarter of 2014, and consistent with our guidance of a loss of $600,000 to $1.1 million. Adjusted EBITDA in the quarter was $620,000, compared to $173,000 in the year-ago period, and was in line with our guidance of $500,000 to $1 million.

Non-GAAP loss per share was $0.04, based on 32.5 million weighted average shares outstanding, which was in line with our guidance of a loss of $0.03 to $0.05 per share. This compares to a loss per share of $0.04 on 32.1 million weighted average shares outstanding in the year-ago period.

On a GAAP basis, our gross profit was $21.3 million, operating loss was $3.2 million, and our net loss per share was $0.11 in the quarter.

Turning to the balance sheet and cash flow -- we ended the quarter with cash and cash equivalents of $21.2 million. We generated $385,000 in cash flow from operations in the second quarter, and we also invested $2 million in capital expenditures in capitalized internal use software during the quarter, which equates to a negative free cash flow in the quarter of $1.6 million. This compares to a negative $861,000 of free cash flow in the year-ago period.

The capital expenditures related to our purchase of an enterprise storage solution as part of our operating infrastructure. This was an important hardware upgrade for us as a company.

I'd now like to finish by providing our financial outlook for the third quarter and the full year 2015. For the third quarter we are targeting revenue of $32.9 million to $33.4 million. From a profitability perspective, we expect non-GAAP operating loss of breakeven to $500,000 for the third quarter. Non-GAAP net loss per share is expected to be in a range of $0.01 to $0.03 based on 32.6 million weighted average shares outstanding.

In the third quarter, adjusted EBITDA is anticipated to be in a range of $1.1 million to $1.6 million. For the full year 2015, we are tightening our revenue guidance to $132.5 million to $133.5 million, which represents year-over-year growth of 6% to 7%.

Excluding Rovio, revenue growth is expected to be in the 8% to 9% range and, on a constant currency basis, 11% to 12%. We anticipate professional services will be approximately $1 million per quarter for the remainder of the year.

In terms of profitability -- we reaffirm our expectation to return to operating profitability on a non-GAAP basis in the fourth quarter of 2015. We are forecasting a full-year non-GAAP operating loss in a range of $500,000 to $1.5 million, an improvement of $1 million on the low end of the range versus our prior guidance. This represents non-GAAP loss per share of $0.06 to $0.09, based on 32.6 million weighted average shares outstanding.

Adjusted EBITDA is targeted to be in a range of $5 million to $6 million for the full year, compared to our prior guidance of $4 million to $6 million. And lastly, we are estimating free cash flow of $0 to $2 million for the full year, which is consistent with our prior guidance.

In summary -- as we look ahead, we remain optimistic about the market opportunity that is in front of us, and we do believe the steps that we have taken will improve our execution and lead to increased growth, improved profitability, and greater shareholder value over time.

With that, we will now take questions. Operator, we are ready to begin Q&A.

(Operator instructions) Tom Roderick, Stifel.

This is Parker Lane in for Tom Roderick.

Kevin, last quarter, you said you expected average revenue per premium customer to be down sequentially because of some overage charges. Obviously, that was up this quarter. Could you just provide some color on what that was related to?

Sure, it was a combination of a couple things. A, we're seeing better traction and upsells within our existing base. David had commented a little bit about the traction that we're seeing in the Video Marketing Suite, and we're seeing meaningful upsells across a lot of our customer base that way. So that's certainly part of the increase in the revenue per premium customer metric that we're seeing right now. It's a little bit offset by some of the customer decline that we had this quarter, but in general, we're seeing some pretty positive trends there. That's up 7% year over year.

All right, great.

And then, just the next question is -- how is the sales force aligned across your two main business segments? And is there a line of sight into any additions into the salesforce towards the back end of this year? And maybe a comment on how the levels of churn have been in your sales force to date?

Sure, hi, this is David.

We're pretty pleased with how our sales force has evolved. We've added a lot of talent over the last year, much of which is ramping.

We're organized as follows. One of the insights we had a few years ago was that what I call one-size-fits-all organization didn't make sense anymore as the world of online video had evolved -- that having the same person call on a broadcaster in the morning and a bank in the afternoon didn't make sense. It really required us to have domain knowledge, relationships expertise, and focus the right go-to-market for each of our key markets.

So we have two primary sales organizations. Our media team is focused on a target account model, the top 300 to 500 media companies, as well as new media companies in the world. It's largely an outside sales force.

There is both a new business component and account management component. And the account management component is responsible for both renewals and upsells. We have the largest concentration, as you'd expect, in North America supported by a solution architecture and sales engineering team, but also similar in the Asia Pacific-Japan region and the European region.

The digital marketing team is a little bit different. Those deals are sold mostly by an inside sales force -- there are some exceptions on that -- which is a little bit different model. Instead of it being a target account model to a small number of customers, it's more of an inbound model to a much larger pool of potential customers. There's tens of thousands of potential prospects for our digital marketing solutions. So that that's driven more by an inbound model and an inside sales force. And that is a matrix with our international team.

And one of the things I'm quite excited about, and I already mentioned in the script, is we have had some people change here and had the opportunity to take advantage of -- I don't know if that's the right phrase -- to promote one of our stars who has been with us, really, since the beginning of the Company, and helped found and drive the success in our APJ region, and get his support and help also to help us drive success in the European region, where we've had some challenges recently. So the digital marketing, digital media sales teams, work worldwide, but in a matrix fashion, which is quite common with international operation, working with Andy and his team in those regions.

And he had commented about how many people were we going to add in the second half of the year, and we do plan to add more people on the second half of the year.

Yes, there's a small number of open positions in different positions, new business or account management. It's not a very significant change. As we said last quarter, we think there's still efficiency to be gained from the team as some of the people that we hired in the first half continue to ramp.

Great, thank you.

(Operator instructions) Dan Bergstrom; RBC Capital Markets.

Total premium customers was down quarter over quarter. How should we be thinking about that? Is that simply the softness in Europe, as you mentioned?

Yes, thank you for bringing that up. Certainly, we're frustrated by that. And I think that looking at that, the predominant rationale for that is the softness in Europe in the first half. And so that is something that we've already taken measures to address.

I just mentioned that a few minutes ago with the promotion of Andy Feinberg, and hopefully he'll be able to kick in and work closely with the team and drive some improved results over the next two, four quarters. So we feel good about that.

I do think it's worth mentioning something we've said before -- and you'll forgive me for repeating myself if you've been on this call a lot -- which is the customer count isn't necessarily always the best way to understand the dynamics of our business. Because it doesn't take into account the size of the customer or the fact that in many cases we'll sell to a customer and then sell to them again and again and again, but it always counts as a single customer. And so it can be a little bit misleading in that regard where you could lose a small customer and gain a large customer.

Our sales force is incented to drive long-term committed revenue, not customer count. Now, that said, just to go back to the original point, we're not happy with the number. It is predominantly caused by the situation in Europe, and we have work to do to improve that.

Thanks.

You talked about a 50% to 100% uplift in customer revenue due to mitigation of ad blockers. Is that typical? And I guess, if so, why would anyone not use your services?

All right. So when we have one of those openings in sales, you're welcome to join us.

(Laughter)

That was a new solution. So we've talked quite a bit about the Once product and the idea of server-side ad insertion. We've talked quite a bit about our new modular player service that we call Brightcove Perform. And we've talked a little bit before about how, by using them together, you really get the best of both worlds, and it really solves some of these problems in ad yield.

It fixes what people call breakage that might be caused by ad blockers. It might be caused by device reach, it might be caused by latency, it might be caused by errors. And because of the qualities taking advantage of the best of both of those technical approaches, we can actually solve that problem.

So bringing those together is something that was new for us in the quarter. And so that data that I cited for you was one of our first few customers that was able to launch, but not just launch, but really partner with us to do what they call AB testing. And if you are not familiar with the phrase, basically they would have identical versions of the page with our solution and with their legacy player-based solution, and that's what the uplift was in revenue.

So we still are early in that regard. When I have, I don't know, a dozen customers with data, then I think we'll really be on a roll. But I think we have the early proof points to really start selling that very aggressively, making that a key point that we talk to every customer about. We're certainly doing that already.

I think your point is absolutely right, and that's why I'm excited about it, which is -- I think we solve a very interesting problem that leads to short-term and immediate revenue growth in a tangible way, and that's exciting. So I share your excitement. It is early so I don't have a dozen proof points yet. But that study was really exciting for us, and that's why I talked about it.

And then, Kevin, could you repeat the geographic breakout, please?

Sure, in terms of revenue?

Yes, percentage, whatever --

Sure. So percentage of revenue is 64% in North America, 16% in JPAC, and 20% in EMEA.

Thank you.

Thank you. Ladies and gentlemen we have no further questions at this time. I would like to turn the floor back over to management for closing remarks.

Thank you very much. I appreciate everyone joining the call.

I want to stress that while there were some mixed results within the quarter, we're very positively inclined by some of the proof points in the quarter and some of the opportunities we see. While the overall revenue came in a little bit under where we had guided, when we disaggregate our business and look at our regions, we really can point to some specific weakness in Europe.

That doesn't make us feel good about the overall results, but it does help us understand that. And what we're seeing is actually strong double-digit growth in both the APJ region and the North America region. And as we fix and improve the situation in Europe, which won't happen overnight, we have some work to do, we intend to get back into those growth rates over time.

With that, we're very excited about where we are; there's a lot of opportunities. We look forward to driving shareholder value for all of our investors. Thank you very much.

Thank you, ladies and gentlemen. This does conclude our teleconference for today. You may now disconnect your lines at this time. Thank you for your participation.