Brightcove Inc. Q1 2023 Earnings Call
Percent growth in new business in Q4.
Historically, new business is only represented 20% to 30% of total bookings in a quarter Q4, and Q1 were over 35%. Excluding this large deal.
As we continue to execute on our strategy, we're clearly pursuing a more balanced mix of new and add on selling.
Since implementing our focus upmarket a few quarters ago. We've also seen much higher average deal sizes and new business with that average up three <unk> this quarter versus the year ago quarter and up two to three X each quarter for the past three.
So we're doing bigger deals and more overall, new business driving the potential for real long term growth.
The other side of the story as our add on sales to existing customers and we're having challenges there as I described earlier driven by the combination of two factors.
One a lengthening of sales cycles, driven by what we believe is short term macroeconomic uncertainty.
And to an increase in flat or down renewals, where we're retaining the customers, but at a flatter lower level of spend.
The silver lining here is that the overwhelming majority of customers are remaining on brightcove in these renewals and still see growth in their usage, albeit slower than previous years.
Put simply these customers entitlement commitments are right sized for the current usage trajectory.
So all these dynamics are weighing on revenue growth near term ultimately, we believe our business model will be stronger and more predictable as pure entitlement add ons and overages become a smaller portion of our revenue.
Strategically we clearly recognize it is critical we expand our product portfolio regularly with additional solutions that broaden our value proposition and provide additional sales opportunities with existing customers.
Using our strategic framework. These are the more end to end and accelerating incubate parts of our strategy.
We've made great progress here across our portfolio of both media and enterprise customers announcing in Q1 and early Q2, several new solutions that we're focused on one driving new revenue for our customers to easing the launch of new business lines distribution points are streaming channels for those customers three delivering more and better analytics and.
To help those customers manage their businesses and four expanding our use cases, which should enable more cross sell and up sell opportunities.
These solution announcements in Q1, and Q2 included Brightcove AD monetization, our new service and operations team designed to improve content monetization for media companies in partnership with magnate.
A partnership with frequency, a leading provider of fast free AD supported streaming TV products to launch an integrated solution, enabling customers to seamlessly create linear experiences distributed across fast mvpds and virtual mvpds distribution channels globally.
Breakup communication studio our video first solutions purpose built for HR and communications professionals.
And enterprise focused e-commerce integrations with Shopify, Salesforce sales cloud and Instagram that allow our customers to distribute and analyze video across each of these platforms to drive leads or revenue.
And finally, our quality of experience product launch from our analytics and insights team that measures beyond standard video metrix to the actual performance of the content experience of each customer.
This product relies deeply on our use of machine learning to construct tolerances and analysis of start time install rate error rate and other metrics.
As a side note <unk> is a great example, where we have built and refined ml models on top of existing engines to deliver better analytics and insights for our customers.
We currently use AI artificial intelligence, our ml machine learning models to fulfill capabilities like our auto capturing feature or our context aware and coating solution.
Longer term, though we get even more excited about how this can help us and our customers beyond the video experience with the content itself.
We are in discussions with some of the largest AI players and how we might leverage their engines with our customers in terms of automated content generation and discovery.
No hype cycle announcements from us today, but we believe long term there is a great opportunity here for us and our customers.
From a go to market perspective, Super serving our largest and most strategic customers has been the first key priority and as I mentioned earlier I'm thrilled with our incredible progress here, especially in new business.
Also from a go to market perspective, partnering in the broader market is key and we've started to deliver on this through deals with the likes of Roku magnate frequency in the E Commerce integrations I mentioned.
We're also working more closely with our cloud partners AWS and Google to find the best ways to partner to drive new and expanded opportunities in their broader customer basis and teams.
The progress so far in 'twenty, three and our strategy shows we are starting to get more traction in the market, but also have much more ahead to accomplish to drive renewed growth.
Confident that our strategy will provide us with numerous opportunities for future success.
Our confidence in our ability to grow faster and more profitably long term. It's also driven by how we see the market evolving and how our strategy will enable us to benefit from those trends.
Most importantly, overall streaming usage continues to grow even if at a slower pace post COVID-19.
But other dynamics in our end markets drive our belief too.
On the media side of our business large streamers are shifting focus to strategies that balanced growth with greater focus on profitability.
Our ability to provide the streaming experience their users are accustomed to at scale and at a far more attractive cost is definitely resonating.
We've demonstrated this in action each of the last few quarters, especially with the largest new customer deal in Q1.
Emerging streamers globally are seeing strong growth in users and subscribers and have been and will continue to need platforms like brightcove to cost effectively scale their businesses.
And creators and producers are also now looking outside their core platforms like Youtube for new growth where.
We're working on a number of opportunities in this space and have leaned in by recently, adding midcon the worlds leading conference for creators as a customer.
On the enterprise side of our business the importance of streaming video continues to grow and driving businesses forward.
We believe companies, who can effectively leverage streaming video develop one a closer and more engaged consumer experience to greater demand generation and sales activity and three increased customer loyalty.
Customers leveraging video to drive better experiences across their own digital platforms and third party destinations are using brightcove.
And the ongoing shifts in hybrid and working environment has made off site employee engagement and communication and increasingly important priority for enterprises too.
Our customers are leveraging brightcove for a variety of workplace uses from employee training to hybrid worker engagement sales enablement.
Streaming video really is the future and even the now of work.
To wrap up before turning it over to Rob I want to reiterate that despite the near term challenges, we are making significant progress improving our long term business.
We're going after and markets that are both growing and heading in our direction long term, our new business engine is working.
Customers remain committed to us or.
Our product and engineering teams are innovating and delivering with greater velocity and regularity.
And we're seeking and finding strong partnerships.
In the near term, we will double down on operational excellence and focus on the things, we can control, especially managing costs.
But do feel strongly that we have the right pieces in place for brightcove to be significantly more profitable and larger company overtime.
We will continue to invest in iterate and strengthen our strategic plan and do so diligently and responsibly. So we ensure we deliver the long term financial performance our shareholders expect.
All with the continued vision of being the most trusted streaming technology company in the world.
With that I'm going to turn the call over to Rob for a deeper dive on Q1, and the numbers and I'll be back for Q&A.
Thank you Mark and good afternoon, everyone I will begin with a detailed review of our first quarter and then I'll finish with our outlook for the second quarter and the full year of 2023.
Total revenue in the first quarter was $49 $1 million, which was in line with our guidance range breaking revenue down further subscription and support revenue was $47 $1 million and professional services was $2 million overage revenue in the quarter was $1 $4 million.
Revenue came in at the lower end of our guidance range due to a handful of small items in the quarter, including slightly lower overage and professional services revenue one time credits to customers and the timing of when deals are signed within the quarter.
12 months backlog, which we define as the aggregate amount of committed subscription revenue related to future performance obligations in the next 12 months was $129 $3 million.
This represents a slight year over year increase.
Total backlog was $181 $2 million or <unk>.
14% increase year over year, the strength and total backlog was driven by a higher percentage of multi year bookings, including the large media when mark referenced earlier.
On a geographic basis, we generated 59% of our revenue in North America during the quarter and 41% internationally.
Breaking down international revenue, a little more Europe generated 17% of our revenue and Japan and Asia Pacific generated 24, 24% of revenue during the quarter.
Let me now turn to the supplemental metrics, we share on a quarterly basis.
Net revenue retention in the quarter was 94%, which compares to 94% in the fourth quarter of 2022 and 98% in the first quarter of 2022.
Since the beginning of 2019 net revenue retention is range from 92% to 100% we expected as we continue to make improvements in our renewals business. This metric will consistently be over 100% overtime.
Recurring dollar retention rate in the first quarter was 88%, which was below our target range of low to mid nineties.
Gross retention in the quarter was in line with our expectations.
As Mark mentioned add on sales to existing customers was lower than expected, which more directly impacts this metric.
Our customer count at the end of the first quarter was 2000, and 739 of which 2180 were classified as premium customers.
Looking at our <unk> within our premium customer base, our annualized revenue per premium customer was $89400 and excludes our entry level pricing for starter customers, which averaged $3900 in annualized revenue.
This compares to $96500 in the first quarter of 2022.
As a reminder, our overage revenue is factored into this calculation and the slowdown in Overages is putting pressure on our ARPA.
Looking at our results on a GAAP basis, our gross profit was $28 $8 million operating loss was $10 $7 million and net loss per share was 28 cents for the quarter.
Turning to our non-GAAP results, our non-GAAP gross profit in the first quarter was $29 $6 million compared to $35 million in the year ago period and represents a gross margin, 60%, which was down from 66% in the first quarter of 2022.
The decrease in margin is driven primarily by higher amortization of internal use software and higher cloud compute costs related to new services.
non-GAAP loss from operations was $5 $6 million in the first quarter compared to positive $3 $8 million in the first quarter of 2022.
Adjusted EBITDA was negative $2 $7 million in the first quarter compared to positive $5 $1 million in a year ago period and below our guidance range.
Primary driver and the lower than expected profitability was higher head count costs due to success and strategic hiring and attrition rates that were more than 50% lower than our historical levels.
non-GAAP diluted net loss per share was <unk> 15.
Based on $42 5 million weighted average shares outstanding.
This compares to net income per share of <unk> 10.
$41 9 million weighted average shares outstanding in the year ago period.
Turning to the balance sheet cash flow, we experienced a short term impact from the collapse of FCB Silicon Valley Bank, who is our primary U S banking partner.
We ended the quarter with cash and cash equivalents of $12 $5 million.
We used $12 $6 million in cash flow from operations and free cash flow was negative $17 $5 million after taking into account for $9 million in capital expenditures and capitalized internal use software.
While we expected to use cash in our first quarter and our plans for the year.
Fcb's collapsed significantly impacted cash collections at the end of the quarter by approximately $7 million to $10 million, creating atypical results, which we do not expect to reoccur.
S V was one of our primary banking partners used by our treasury operations to accept customer payments and it took time to direct customers to other financial institutions, specifically bank of America for much of our U S based receivables.
This was entirely a matter of timing and the majority of the crash collections delayed by this banking transition have already been collected.
On a go forward basis, we will be operating with multiple U S banking partners. In addition to our existing international banking partners.
We currently hold a line of credit with Seb first citizens and are exploring options for the best line of credit partner and structure in the future.
I would now like to provide the details of how we are approaching guidance and the factors that are driving both our revenue and profitability guidance for the year.
As Mark mentioned, we are seeing short term headwinds that are putting downward pressure on our revenue results.
Specifically two key trends are driving our revised point of view.
First we are seeing a lengthening sales cycle, especially at our larger target customers.
New and add on opportunities that we've closed recently or are currently in pipeline are simply taking longer to get done as customers manage through the uncertain macroeconomic environment.
Second our recent and meaningful drop off in demand for add on entitlements with existing customers.
Offsetting the short term trends, we are seeing our strategic initiatives begin to bear fruit the push up market to larger customers and the more end to end platform are showing initial signs of success.
We closed our largest new business deal in the company's history saw a return to growth in our 12 month subscription backlog and saw double digit growth in our total subscription backlog.
The combination of short term headwinds and the traction of our strategic initiatives is informing both the Q2 and full year guidance, we are providing for revenue.
For the second quarter, we are targeting revenue of $50 to $51 million, including $1 million of Overages and approximately $2 million of professional services.
For the full year, we are revising our revenue down to a range of $204 million to $209 million, including $4 $4 million of Overages and approximately $8 $8 million of professional services revenue.
With the lower revenue guidance for the year, we still remain committed to an adjusted EBITDA of $16 million to $19 million. In 2023, we believe it is critical to manage the business profitably and with positive free cash flow.
In order to achieve these goals we have taken the following actions.
First we are reducing our head count by approximately 10%, which would result in approximately $2 million in severance costs in the second quarter.
And second we have meaningfully cut costs in several areas of the organization, including marketing real estate and travel expenses.
These savings are designed to reduce operating costs improve operating margins and drive our focus on key growth and strategic priorities.
We expect these changes to drive over $10 million of expense savings in the remainder of 2023 and a drive over $13 million in expense savings on an annual basis.
These cost savings actions enable us to maintain our adjusted EBITDA and free cash flow outlooks for the year. Despite the reduction in our revenue guidance.
For the second quarter, we expect our non-GAAP operating loss between $1 $3 million and $300000 in adjusted EBITDA to be between one eight and $2 $8 million non.
non-GAAP net loss per share is expected to be in the range of four cents to <unk> based on $43 1 million weighted average shares outstanding.
For the full year, we are maintaining our outlook on profitability and we expect non-GAAP operating income of 3 million to $6 million and adjusted EBITDA to be between 16 and $19 million.
non-GAAP net income per share is expected to be in the range of three cents to 10 cents based on $43 4 million weighted average shares outstanding.
For the full year, we continue to target free cash flow of breakeven to $5 million or 17, and a half to $22 $5 million from Q2 to Q4 as we drive increased profitability in the second half of the year and our investments in internally developed software returned to the levels prior to 2022 of 2 million to $3 million for.
Quarter.
We are confident that while the results of our long term investments may be delayed we are seeing initial signs of success. We are committed to driving profitable growth and expect brightcove to return to growth and meaningful profitability in the second half of this year.
In fact, if you look at our Q2 and revised full year guidance. It shows that we plan to exit 2023 at a meaningful growth rate on revenue and now at an improved EBITDA margin.
Well being set up to be a meaningful generator of cash going forward.
That type of second half performance in 2023 will put us on the path to the long term targets. We set out last November and are reiterating today consistent double digit revenue growth and 20% plus adjusted EBITDA margins with that we will now take your questions. Please give us a moment to prepare Q&A.
Thank you everyone for joining us this afternoon.
Open questions from Steve Frankel Rosenblatt Securities.
Hey, good afternoon, Mark could start with this.
Large media win you had in the quarter.
Can you talk to us about the path to going from the professional services related to that contract to getting to the recurring revenue piece.
Sure, it's actually a majority recurring revenue type of deal that one specifically.
I believe as a small services in there, but majority of it is implementation and support services and the rest is recurring software revenue is going to take a bit of time to implement on the on their side, because it's a large implementation, but it will happen over the next few quarters.
Hence the reason for that or not.
Disclosing the partners, they're making a lot of changes on their side and those type of things and then we'll work with them on how we can put together a case study.
On the on the initiative and we're really excited about.
Kicking off the partnership with them in the long term.
We're going to have with this partner.
Okay.
Does that imply that we wont see meaningful revenue from that deal. This year, it's more of a 'twenty. Four event you will see meaningful revenue is right around that but yeah. You will see minimal revenue you will see meaningful revenue its a big piece of the step up in revenue from Q1 to Q2. That's included in the guide.
Okay, and then on the magnetic partnership can you.
Talk to us about some early feedback and what's the timing to get that to be a contributor to your revenue growth yeah. So we've.
Announced the partnership in early Q1, we really launched a let's call. It you know go to market on getting partners involved later in the quarter.
We now have partners launched on the service Brightcove AD monetization is the name of the service and we will start to have inventory flowing through now I would not expect meaningful revenue in Q2, it'll be relatively de minimis, because it's going to be a handful of partners for the quarter with inventory and we're really looking to the back half of this year to ramp it as we ramp the number.
<unk>.
Customers that have come onto the service and then the fill that we can do there. So like any other sort of startup AD business, just going to take time to get the inventory flowing but our goal is by the back half of the year to start having revenue we can talk about.
Okay.
Yeah.
Just in terms of the pipeline of other large deals.
Get the sense that.
Execute on those you need you're going to need to get this first one launched and people need to see that win or do you think you can convince other customers to do this.
Extra push I think both right I think we can absolutely and will and have been convincing other maybe not as big as that one but there are going to be other big ones like that that are.
In the mix there are some that I believe are existing customers that we can take up to that kind of mix. You know, we have small or medium size relationships with almost with dozens of the largest companies in the world in this space and we believe we can expand those as well. So my take is just those sales cycles. On these larger deals are there are quarters long not months long and when we do.
Get into the sort of discovery phase and how much we can do with them. So I think it's just taking us a little longer than we had hoped as we think about those sales cycles on more of those deals, but we absolutely think there are more out there.
In the near and long term.
Okay, and then Rob on gross margins should we assume that gross margins kind of stay in this level until you get revenue growing meaningfully yes, I think you should start to see improvements in gross margin starting in Q2, and we're pushing on that over the course of the year, you'll see revenue growth impacting that but we've also got internal initiatives to focus on it.
Okay, great. Thank you.
And next we will take questions from Mike Latimore at Northland Securities.
Great. Thanks very much.
On the.
The new bookings are the new logo bookings, let's say have been really strong.
For several quarters, obviously this quarter was big as well.
<unk> said that that is starting to slow a little bit or is the momentum continuing there.
Well it was a record new business quarter up 325%.
I would absolutely expect that to slow down from 325% growth that will not happen unless we have another large customer come in that way. The excluding that large deal was 35% growth in Q1. It was 40% growth in Q4. So I think I don't think we don't necessarily look at it as that percentage growth going up or down, but just that it's a really healthy percentage rate and a healthy percentage growth over.
Over the previous year as long as that is healthy we are feeling good and we see we're seeing good traction there, we're not going to see you're not necessarily seeing that slowing down per se.
New business piece is working I think the places we're focused on obviously is the add on is a different story.
Okay and then on the.
Yes.
Is there a noticeable difference there between say the enterprise market versus the media market.
On business Youre, saying.
I think we're seeing.
<unk> enterprise.
Look pretty similar.
In terms of new business growth and in add on it's actually a little bit better because it's a little less a little more resilient versus entitlement add on sorry. It does not so dependent on pure traffic growth and usage growth being the way we upgrade those businesses. So I would say.
Domestic enterprises, probably stronger from an add on perspective than than say global media for example.
Okay.
And then.
In terms of just the cash position, where do you see that bottoming is here.
Yes, I think we're going to be generating cash at a free cash flow line every quarter going forward. This is definitely a bottom you saw the.
Our pop pretty pretty significantly from 26 million at the end of Q4 to 40 over $40 million at the end of <unk>.
Q1, really driven by that SCB collapse. So we expect to collect the majority of that cash.
We go through the second quarter and expect to be generating cash going forward.
Okay, Great and then.
Any any.
Sure.
Change is there any nuances to your strategy around adding ancillary services.
You've got AD monetization consulting.
<unk> is there anything any change in that strategy.
I think the goal from the product and solutions side is to be regular in terms of how we're delivering right. So I think the.
I don't know if the previous strategy of the company, but the way the company was delivering historically it was sort of like one or maybe two big things a year in.
And we sort of put it all in on those things I think our revised strategy here is to have.
Have a set of initiatives or was it doesn't have a bunch of things that we're going after that will deliver over a period of quarters. So if you look at.
For us here in Q4, we really started to launch communication studio, we announced that a little later, but that's when we started to talk to customers about it.
You can talk about monetization in Q1, you can talk about now are our fast partnership with frequency here at the beginning of Q2, our quality of experience launch a little bit.
Or so later in Q2 and it'll be more coming over the coming weeks and then some of the increased e-commerce integrations that we rolled out.
Q2, I think late Q1 early Q2, so the idea here is to keep adding things on a regular <unk>.
And at more velocity with incremental things. So our team can go out and do more cross sell and upsell, we're going to need it right given the challenges on the entitlement base and.
And so I think that now we're going to hopefully start to see that bear fruit over the second half of the year.
Yes.
Thank you.
Thanks, Mike and well move on to a Max Michael Lewis from Lake Street capital.
Knowing that the two factors elongated sales cycles and the lower entitlement spend I want to know if you or your current guide for 2023 baked in any recovery towards the back half of the year.
Yes, no not materially and if you think about any recovery that we're going to get even if it's in Q4, it's really not going to impact. This year's revenue, that's really going to flow through 'twenty four if that recovery to start.
Okay and then next thing is when did you guys start to notice this lower spend in the quarter.
In terms of the add on yes in terms of entitlement.
Yes, as we talked about it we started the quarter with a strong pipeline and the sales cycles are starting to elongate. So it happened a little bit later in the quarter.
Okay, and then I know retention and are glad at 94% in Q1 anything you can point to in Q2 in terms of strength, maybe uptick in that number at all.
Yes, I think the big piece, there as I talked about on the call. We had a really strong gross renewal rate this quarter.
And the impact on the net and the flatness of the net was really related to the the lack of add ons. So I'd expect that to stay flat over the next couple of quarters.
Okay. Thank you.
Thanks Max.
Well with that I'll say, thank you all for joining today hopefully despite the challenges we're facing you see our commitment to delivering a return on investments the investments, we're making for shareholders.
Strength in new business that we're excited about going forward.
Large customers, returning and staying with US you can see the product deliveries, becoming more regular and consistent and we're excited about where that's headed and hope you've seen we've made the right changes to the business going forward given the challenges we're facing.
To be able to have the right position for the long term, especially with regards to adjusted EBITDA and free cash flow.
And then finally, we're committed to the long term strategy because we believe it's the right thing for the business and for the industry long term and believe it will deliver outsized returns over the over the long run.
For our shareholders. So we're excited about that.
With that I'll. Thank you for joining us today and look forward to seeing you next quarter.