Brightcove Inc (BCOV) 2018 Q1 法說會逐字稿

Greetings, and welcome to the Brightcove First Quarter 2018 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce you to your host, Brian Denyeau, Investor Relations. Thank you. Mr. Denyeau, you may begin.

Good afternoon, and welcome to Brightcove's First Quarter 2018 Earnings Call. Today, we'll discuss our results announced in our press release issued after market close today. Within the call are Jeff Ray, Brightcove's Chief Executive Officer; Andrew Feinberg, Brightcove's President and Chief Operating 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 fiscal guidance for the second fiscal quarter of 2018 and the full year of 2018, expected profitability and positive free cash flow, 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 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 and as updated by 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 market close today, which can be found on our website at www.brightcove.com.

In terms of the agenda for today's call, Andy will provide a summary review of our financial results and an update on our operations. Jeff will provide a look at our current market opportunity and his plans for the company going forward. And Kevin will finish with additional details regarding our first quarter 2018 results as well as our outlook for the second quarter and full year 2018.

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

Thank you, Brian, and thanks to all of you for joining us today. Before I go into more detail about the quarter, I'd like to welcome Brightcove's new CEO, Jeff Ray. Jeff has been with us for 2 weeks now and we are excited to have him onboard. He has tremendous experience leading technology and software companies, and we look forward to him leading our company through our next phase of growth. So Jeff, welcome. It's a pleasure to be working with you.

Andy, thank you. I'm happy to be here.

Great. Before we hear from Jeff, I will share and discuss some highlights from our first quarter performance. I'm happy to report that Brightcove delivered a strong start to 2018. Our first quarter financial results exceeded our expectations on all key metrics, and we saw strong performance from all businesses in all geographies.

Taking a quick look at our financial results. We delivered first quarter revenue of $41.2 million, which exceeded the high end of our guidance. We delivered adjusted EBITDA, a positive $900,000, which was also well above the high end of our guidance. Our recurring dollar retention rate was 103%, a multiyear high point.

We signed exciting new customer agreements and upsell and renewal agreements with such notable brands and content providers as: Discovery; Dunkin' Brands; EMC Corporation; Forbes Media LLC; General Motors; Harley-Davidson; Hess Corporation; MBS Spring; Network Ten; News UK; Opel Automobile; Pandora, the Danish jewelry retailer; Production IG; RLJ Entertainment; SoftBank; Sony Pictures India and Spotify among others.

We were particularly pleased by our bookings performance in the quarter, and we saw strong bookings performance across both business groups and across all geographies. There are a few areas I will call out that showed notable strength. In particular, we saw good, early results from the changes we have made in our North American media sales team. The new head of this team, who had previously had great success running our Asian sales operations, has hit the ground running. The strategic consultative solution-based selling approach we are instituting drove several good customer wins in the first quarter and more importantly, sets us up for greater success going forward.

Europe had the best quarter we have seen in that region in several years. Over the past year, the new sales leadership we had brought to the region has made significant personnel and go-to-market changes that better position us for success. While we are still maturing the team in the region, we believe its performance in the first quarter is a positive indication that it is on the right track.

We also had a strong quarter in our digital marketing and enterprise business, particularly in North America. We were pleased with the breadth of activity in the quarter, which had a good mix of new logo and upsell activity. We are now seeing the positive benefits of the investments that we have made in this sales organization in the past, and we are realizing good productivity improvements across the teams.

Our teams in Japan and Asia Pacific continue to succeed, and we are capturing the exciting growth across that region in the introduction of new SVOD and OTT businesses.

A particularly exciting win from our enterprise team was a 3-year multimillion dollar transaction with 1 of the world's largest auto companies, a deal which we had identified last quarter. This existing customer had previously used Brightcove in one segment of its business and was looking to standardize on a single platform for its internal communications. After conducting a comprehensive bake-off, evaluating us against a number of our competitors, some of whom it used in other segments of its business, this customer chose Brightcove. It did so for 2 primary reasons: one, our continual innovation and feature-rich differentiated offerings, including but not limited to our innovative Gallery sites, our highly integrated social tools and our ability to create and run a private employee YouTube experience; and two, our exceptional worldwide support and customer success organization with which this customer has had an excellent ongoing relationship over the years.

This win is particularly exciting for a few reasons. First, it validates the significant opportunity for internal enterprise use cases and our EVS solution. Enterprises are increasingly recognizing that video is a compelling medium that can enable improved engagement and performance across the organization. And second, this transaction shows the opportunity to sign large deals in the enterprise market. This is a great example of the land and expand opportunity among enterprises, which we believe will only grow over time. We have the broadest, most effective product portfolio that is purpose built for enterprise and digital marketing use cases. We believe this is a sustainable competitive advantage. The fact that we were able to win against the long list of competitors is a good demonstration of the strength of our video solutions.

Another highlight in the quarter, which cuts across our entire business, was our recurring dollar retention rate of 105% -- 103%, which was the highest it has been in more than 2 years. This strength was driven by solid renewals and a larger contribution from upsell bookings at the time of renewal. This would be a terrific retention rate in any quarter, but it is particularly satisfying here as it reflects, in part, our success in working through that final quarter of our commodity pricing reset in the media business.

I am pleased to say that we've now completed that process, and we have a healthier, stickier and higher value-added revenue base among our media customers. With this process now behind us, we expect our recurring dollar retention rates to be at or above our historical levels of 91% to 94% on a consistent basis going forward, which is a key element of our strategy to return the company to sustainable double-digit revenue growth.

Overall, I am very proud of where Brightcove stands today. We have built and deployed innovative, market-leading technology that solves complex technical problems so customers can use video to captivate audiences, to monetize their premium content and to drive better engagement with their customers and employees.

We are operating a growing global service at a massive scale reliably and dependently. In many markets around the world, we have now become trusted advisers to our customers, helping them to build and deploy strategies to harness the power of video to tell their stories and to share their messages.

I've enjoyed leading the company over these last 3 quarters, and I am proud of our team and what we have accomplished. I am more confident than ever that we have the right people, the right products and the right strategy in place to take the company through the next phase of growth. I'm excited to see what we will do under Jeff's leadership.

So with that, I will now hand the call over to Jeff.

Hey, thank you for the kind words, Andy, and for your leadership over the past 9 months. I'm incredibly excited to have joined Brightcove and lead the company into its next phase of growth. I've been here for 2 weeks now and have really been paying attention to meeting the team and learning all aspects of our operations and I'm impressed with what I've learned about our company so far. Since this is my first time speaking with the Brightcove investment community, I would like to spend a few minutes talking about my background and outline what attracted me to Brightcove and what my priorities will be as CEO.

I've spent more than 30 years in global software enterprise businesses, serving a number of different technologies and industries. For example, most recently, I was CEO of Ellucian, a private-equity-owned ERP provider that focused on the global higher education community, with revenues in excess of $800 million. And we led a recent transaction that valued the business at $3.5 billion. Prior to that, I held senior executive positions at ABB Ventyx, Dassault Systemes and SolidWorks. In those roles, I was fortunate to have worked with great teams who drove significant value creation by obsessing on customer success by delivering an exceptional customer experience. I'm grateful for the opportunity to bring that same experience and focus to the great customers and people of Brightcove.

Customer success will be the heart of everything we do at Brightcove. We will have a relentless focus on ensuring our products add real business value for customers and are easy and powerful to use. From a sales perspective, we will be aligned to ensure our messaging is appropriate for specific customers. Then, that we make it easy to do business with Brightcove in that all aspects of the sales and renewal processes are as frictionless as possible. I strongly believe that if we make the customer experience the organizing principle for Brightcove, that we will be highly successful for both our customers and our shareholders.

In my initial conversations and meetings, it's evident that we have a world-class talent across the organization and have built market-leading products that put Brightcove at the forefront of the video revolution. As CEO, my focus is on leveraging that talent and product leadership with a go-to-market program that can drive faster and more profitable growth.

In a few weeks, we will be hosting our annual user conference, PLAY, in Boston. This year promises to be our best PLAY yet, and we're expecting a 30% increase in attendees compared to last year, which was also a record year. Our PLAY conference has established itself as the premier conference in the video industry, where customers can learn about the innovation that Brightcove has been working on to improve their business performance.

Just as important, PLAY is designed to let customers interact and engage with one another and learn how others are using Brightcove solutions to deliver engaging consumer video experiences. I am most excited to meet with and learn from our customers about what their needs are and how Brightcove can add even greater value.

I look forward to meeting with many of you in the investment community in the coming months. I am committed to driving improved performance at Brightcove and delivering value to our shareholders.

With that, let me turn the call over to Kevin to walk through our results. Kevin?

Thank you, Jeff, and good afternoon, everyone. As Andy mentioned, Brightcove delivered a strong start to 2018. I will begin with a detailed review of our first quarter results, and then I will finish with our outlook for the second quarter and the full year 2018.

Total revenue in the first quarter was $41.2 million, above the high end of our guidance range. Breaking revenue down further, subscription and support revenue was $37.9 million, which was up 11% from $34.2 million in the year-ago period. Professional services revenue was $3.3 million in the first quarter and was consistent with the year-ago quarter.

On a geographic basis, we saw strong performance across all regions. We generated 55% of our revenue in North America during the quarter and 45% internationally. Breaking down international revenue a little more, Europe generated 15% of our revenue, and Japan and AsiaPac generated 30% of our revenue during the quarter. Japan and AsiaPac continue to be strong markets for us as we won several more large deals during the quarter.

From a vertical perspective, our media business represented 56% of our revenue in the quarter and our enterprise business represented 41% of our revenue, while volume business represented the remaining 3%.

Let me now turn to the supplemental metrics that we share on a quarterly basis. Our recurring dollar retention rate in the first quarter was 103%, which was well above our target range of the low to mid-90s and was driven by strong upsell activity during the quarter. As Andy mentioned, we are now through the commodity pricing reset in our media business. We are confident that we will be able to consistently deliver recurring dollar retention rates that are at least within our historical low to mid-90% range going forward.

Our customer count at the end of the first quarter was 4,033, of which 2,180 were classified as premium customers. Looking at our ARPU within the premium customer base, our annualized revenue per premium customer was $75,000, which was up 11% year-over-year and excludes our entry-level pricing for starter customers, which averaged $5,000 in annualized revenue.

Looking at our results on a GAAP basis. Our gross profit was $24 million. Operating loss was $2.4 million, and our loss per share was $0.06 for the quarter.

Turning to our non-GAAP results. Our non-GAAP gross profit in the first quarter was $24.6 million compared to $23 million in the year-ago period and represented a gross margin of 60%. Subscription and support revenue represented approximately 92% of our revenue and generated a 66% gross margin in the quarter.

Non-GAAP loss from operations was $74,000 in the first quarter, compared to a non-GAAP loss from operations of $2.6 million in the first quarter of 2017.

Adjusted EBITDA was $896,000 in the first quarter compared to a loss of $1.6 million in the year-ago period, and above the high end of our guidance range for the quarter. The adjusted EBITDA indeed was driven in part by timing of discretionary investments that will likely happen later in 2018, continued strong expense management as well as the revenue upside that we achieved in the quarter.

Non-GAAP income per share was 0 based on 35.7 million weighted average shares outstanding. This compares to a loss per share of $0.08 on 34.1 million weighted average shares outstanding in the year-ago period.

Turning to the balance sheet and cash flow. We ended the quarter with cash and cash equivalents of $26.4 million. During the first quarter, we generated $935,000 in cash flow from operations. And free cash flow was negative $604,000 after taking into account $1.5 million in capital expenditures and capitalized internal-use software.

Before I turn to our guidance, I'd like to provide commentary on our adoption of ASC 606 during the first quarter. It's important to note that from a revenue perspective, the change to ASC 606 is expected to be immaterial. The expected impact to the top line for Brightcove will primarily be related to how we account for overage revenue. We'll be required to estimate any overages anticipated to occur from our customers in future periods, and any such overages may need to be recognized as revenue earlier than the date that they would actually be invoiced. This will involve judgment in making these estimates, but based on historical analysis, we do not believe that there will be a material impact on our expected quarter-to-quarter overage revenue.

Second, our commission payments will now be capitalized for all new customer contracts and amortized over the average customer life, in our case, 5 years. Any commissions related to existing customer contracts will be amortized over a 12-month period, our typical contract period. This will have a positive impact on our earnings of approximately $1 million in 2018. However, this impact was already factored into our previous guidance.

I'd now like to finish by providing our guidance for the second quarter and full year 2018. For the second quarter, we are targeting revenue of $41.3 million to $41.8 million, including approximately $3.2 million of professional services revenue. From a profitability perspective, we expect a non-GAAP operating loss of $1.9 million to $2.4 million and adjusted EBITDA loss of $900,000 to $1.4 million. Non-GAAP net loss per share is expected to be in a range of $0.06 to $0.07 based on 35.1 million weighted average shares outstanding. As a reminder, we spend more on marketing than any other quarter during the second quarter, including our upcoming PLAY conference.

Turning to our outlook for the full year 2018. We expect revenue to be in a range of $165 million to $168 million. This includes approximately $12.1 million in professional services revenue. In terms of profitability, we're expecting non-GAAP operating loss of $1.5 million to non-GAAP operating income of $1.5 million and adjusted EBITDA of $2.5 million to $5.5 million. In addition, we expect non-GAAP net loss per share of $0.06 to net income per share of $0.02 based on 35.3 million weighted average shares outstanding. For cash flow, we expect full year free cash flow in a range of $1 million to $3 million.

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

(Operator Instructions) The first question comes from Tom Roderick of Stifel.

It's actually Parker Lane in for Tom. Kevin, first one's for you. Based on the guidance you provided for profitability, it looks that you're expecting that to ramp through to the end of the year more so than in the second quarter. Wonder if you can give a sense of what the investments you'll be making are during this quarter coming up and where you see the leverage coming from through the rest of the year.

Sure. Just a quick reminder that in the second quarter that is the largest quarter that we have in terms of marketing investments, and so that's when we have our PLAY conference and a few other marketing events. We do see it obviously ramping through the end of the year. We were very pleased with what we did in the first quarter in terms of the EBITDA. So I think what you're going to see here is strong EBITDA performance in Q1, a little bit back as we make some of those marketing investments in Q2, and then it ramps in Q3, Q4. Q4 will likely be a stronger quarter than Q3.

Got it. And then you posted a really solid outperformance about subscription and net revenue retention. I was wondering if you could give some color on the contribution from overages in the quarter and if you could call out about the sizable sequential jump in retention, obviously, understanding that you are getting past the commodity model?

Sure. We -- it was a good quarter in general both on bookings. Bookings in the quarter helped drive some of our in-quarter revenue above and beyond what our original guidance was, and obviously, the retention was great. The retention was good, both in terms of upsell activity as well as just retention of existing customer contracts. We felt very positive about all that.

And just to clarify, what did the overages come in at for the quarter?

Sure. Overages in the quarter were $2.1 million.

The next question comes from Steven Frankel who's with Dougherty.

So you talked in the release about reiterating your guidance for full year bookings growth. Maybe you could give us a little more color on roughly what the bookings growth was in Q1 and where you expect it to be for the full year.

Well, we had said at the beginning of the year, in February, that we are expecting double-digit growth for the full year. We can tell you that we did achieve that in the first quarter. We don't want to get into a quarter in, quarter out what exactly what that quarter was, but we were very pleased with the booking activity that we did have.

Okay. And I realize professional services are a key to launching large customers, and so it's a good thing to see that running at the level it is today. But at one point last year, you were able to do those professional services that have positive gross margin. Is there a path to get that business to kind of a breakeven gross margin business?

Yes, Steve, that is the plan, for us to get back to not even breakeven but actually making money there. I had mentioned on the last call that we thought that we had a couple of large OTT deals. They still had very nice, solid margins on the subscription side and that they were effectively running into investment mode a little bit. But we felt still very positive about the overall margin profile of those particular customers. We are going to be launching some of those services here very soon, and then we expect services to go back into the positive side.

Okay. And then -- and maybe a last one. An update on the progress of getting more customers to adopt the Live product.

Sure. Andy, do you want to cover that?

Sure. So we believe that Live is a terrific opportunity, as we've told you before. We continue to see the growth of those opportunities. We're excited about the progress we're making in our product development for a complete Live stack. I know our customers are excited about that as well. And so we continue to be very bullish on the opportunity with Live and our ability to capture that opportunity.

And maybe what percentage of the enterprise/digital marketing customer base has Live today?

It's a small percentage but growing. And many of them, out of the gate, Steve, have Live kind of included in a package at a small level, and then if they adopt more of that, then they can actually buy more Live hours, et cetera.

Right. And remember, we've just rolled out in the past quarters, plural, our enterprise suite.

The next question comes from Glenn Mattson of Ladenburg Thalmann.

First question for Jeff. I know you've only been in the seat for a couple weeks here. But perhaps can you give us any sense of your thoughts about the kind of the go-to-market and that kind of stuff? And do you anticipate any significant changes as you make your assessment here?

Thanks. It would be kind of premature to talk about any specific initiatives. For me, I see great opportunities for us to focus on what I call seamless execution. That takes -- that puts more predictability into the business. The second thing we're going to be paying attention to is customer success. As I said earlier, all decisions will really be based upon what's in the best interest for the customer. The customer becomes the tiebreaker. Ultimately, you win over time. And then we'll also be looking for any new avenues that can drive growth in the business.

Okay,that's helpful. Kevin, you mentioned one of the things that drove EBITDA performance was the timing of discretionary investments. What kind of things were you referencing there?

So some of the discretionary investments that we may have would be like, for instance, marketing spend that we didn't spend in Q1 but we would spend maybe in the second half of the year or even the last 9 months of the year.

Okay. Is that for marketing initiatives or for additional personnel, I guess?

I would say more for marketing initiatives than anything else.

Okay. And then can you talk a little bit about customer concentration? Are we -- have we moved past the days where we have to worry on a quarter-to-quarter basis that a top 10 customer kind of left the platform or in a couple -- in one case went bankrupt or whatever? And is that still a -- something you guys think about frequently? Or is it -- is the customer base more diverse then at this point?

Look, Glenn, it's Andy. Certainly, we always worry about all of our customers, including especially our top 10 customers, but our customer concentration is substantially improved from where we've been in the past. And we feel we're in a much more stable position.

The next question comes from Sameet Sinha of B. Riley FBR.

A couple of questions here. So first, Kevin, can you talk about the gross margin dynamics in the subscription business, how we should think about as that progresses throughout the year, especially as your bookings growth continues to be trending in line and above? And my second question is, in terms of the use cases for your products, do you see that expanding? Do you need to add more products as the kind of online media landscape continues to grow? And then I have a follow-up question.

So I'll cover the subscription gross margin and I'll have Andy talk about the products. In terms of subscription gross margin, it's an area that we have continued to look at. We continue to try and optimize across the organization the infrastructure costs that we have. As we've talked in the past, we've tried to move out of data centers and into the cloud infrastructure. So we've continued to do that and make good progress there. We continue to look at all of those. Some of the new products that we have, a Dynamic Delivery or Context Aware Encoding, some of those technologies as they continue to be adopted by our customers will continue to help our margin improvement as well over time. So it's something that's at top of mind, and we continue to look at it.

And I guess I'll talk about -- I'll talk in response to your product question. As I said in my remarks, we really believe that we have the most complete set of products and features and functionality in the market and in the various sectors. That said, it's a very dynamic market. There are expanding use cases all the time. We think that we can continue to add value by adding features and functionality. We are excited about our road map. And we hope that you'll come see us at PLAY and hear about some of it.

One final question. One question previously referenced the Live product. When you launched that a couple of years back, how is that different from the version 10? What is so different now? Why are you so confident about the adoption? And as a follow-up to that would be, are you targeting like large media companies? And would this be the full platform that they would use? Because they've invested billions into their internal infrastructure. Or do you think this is kind of the redundancy that they would be looking for?

So you've got a bunch of questions in there. Let me try to parse some of them out, if I may. First of all, our expanded Live product stack that we've launched more recently and which we are continuing to roll out, is a much more complete product. There is exciting user interface and a variety of other features and functionalities, which our customers are demanding. Certainly, that's true on the media side. On the enterprise side, there's a lot of internal use case live, company communications live, which we did not offer previously. Those require distinct technologies, and we're very excited about having developed those and rolled them out. Customers are relying upon our Live stack as a primary solution, not just as a redundancy. I think I have answered your questions, but if I've missed some, let me know.

The next question comes from Mike Latimore who's with Northland Capital Markets.

Who's the -- just back on revenue diversity, what is your largest customer as a percent of revenue?

3%.

3%, got it. And then on -- just kind of looking at or thinking about the pipeline of business, is it -- do you see similar kind of proportions in growth in digital media and enterprise? Or is one category going to -- is the pipeline for 1 of those 2 categories growing faster?

We're really excited about both. They're both strong and we're happy with what we're seeing in both sectors. Both grow -- grew double digits.

Okay, good. And then, I mean, you -- with this large, I think you said, oil deal, internal employee communications was part of that. That seems to open up sort of a new market segment for you guys. I guess, how is the pipeline for that particular feature?

So just to be clear, so I think you're referring to the transaction that we referenced in our remarks with a very large auto manufacturer. And that's both internal communications as well as external marketing activities. And we've been successful in both spaces previously. It's not a brand-new sector for us by any means. But certainly, we view this win as a real validation of our solution, especially given the competitive nature of the evaluation. And we're very bullish about what the future looks like in this sector.

Okay, good. And then the -- in terms of just the sales force, did you guys expect to kind of grow the sales force this year so far or at this point in the year?

So we're being very strategic about the choices which we are making. As you'll recall, over the past several quarters, I've done -- we've done a very meaningful sort of productivity, efficiency, effectiveness evaluation. We're going to continue to do that and in fact, look at it very hard. And we've made choices to invest in regions and areas in the sales force where we believe it's appropriate to get an enhanced return and where those opportunities lie. And we're insisting on seeing effectiveness and productivity before we make additional investments.

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

Well, look, thank you. Thank you, everyone. It was a lot of fun seeing this quarter land the way it did, and I really encourage all of you to join us at our PLAY conference in a few weeks. It's going to be a great combination of highlighting products and innovation, but also, you'll be able to hear from our customers in how they're using our products to solve some of their biggest problems. Again, thank you, and we look forward to sitting down with you again 90 days from now. All the best. Goodbye.

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