Q2 2019 Earnings Call
Greetings and welcome to the Brightcove second quarter 2019 earnings Conference call.
At this time all participants are in listen only mode. A brief question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
I'd now like to turn the conference over to your host Brian Denyeau. Thank you you may begin.
Good afternoon, and welcome to Brightcove second quarter 2019 earnings call.
Today, we'll discuss the results announced in our press release issued after market close.
On the call are Jeff right, Brightcove, Chief Executive Officer, and Rob Nork, right 'cause 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.
Any statements concerning our financial guidance for the third fiscal quarter of 2019, and the full year 2019.
Expected profitability and positive free cash flow our position to execute our go to market and growth strategy.
Our ability to expand our leadership position our ability to maintain an upsell existing customers as well as our ability to acquire new customers.
Forward looking statements, we 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 cause actual results to differ materially from expectations.
For a discussion of the mature rough 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 Dot Brightcove dot com.
In terms of the agenda for todays call, Jeff will provide a summary view of our financial results an update on our operations and a review of our strategy.
I will finish with additional details regarding our second quarter results.
As well as our outlook for the third quarter and full year 2019.
Let me turn the call over to Josh.
Thanks, Brian and thanks to all of you for joining us today to discuss our second quarter results I'm pleased with the progress made during the quarter on our strategic initiatives.
We are increasingly confident that the actions were taking in 2019 will enable brightcove to deliver significant consistent and sustainable revenue growth and profitability in the future.
There's more work to do but we have clearly validated the strategy we are pursuing will be successful.
Let's start by briefly reviewing our financial results for the quarter, we delivered second quarter revenue of $47.6 million up 14% year over year and above the high end of our guidance and adjusted EBITDA was negative 0.1 million, which was above the high end of our guidance.
I'd like to spend a few moments providing more detail about the progress we've made on our strategic initiatives as well as an update on the acquisition of the Yala online video platform business.
As discussed on prior calls a key focus is building a predictable selling model that can effectively targeting all customers last quarter. We shared with you that we have introduced specialized sales teams one with an exclusive focus on retention and another on new business generation.
We're encouraged by the positive response from our customers and sales teams.
As a result in the second quarter, we saw a healthy mix of transactions, including a material increase in the number of six figure wins and our overall deal size grew materially driven primarily by larger land transactions as well as the up sell activity into the installed base.
A great example of the progress we're making is in Europe , which had its best quarter in years.
With the recent change in sales leadership, we have attracted more sales talent into the business.
This has provided an opportunity to quickly implement our new more focused sales strategies.
To deliver such strong results while in the midst of implementing these changes is a credit to the talent of this team.
We had an eventful and productive quarter. Besides hosting play our annual user conference that I will discuss in more detail. We also had a significant presence and maybe where we live streamed the baby show for the eighth year in a row and bright Coke life received the future Best of show Award from TV Technology presented at the 2019 and Abby show.
In addition, we completed our account segmentation analysis to support a more targeted high ROI marketing program to support breakout growth.
Finally, we added great new talent to the marketing team with the addition of Emma Vanstone Booth as our new Vice President of International marketing working closely with our Chief Marketing Officer, Sarah Larson and what will be responsible for driving brand awareness and increasing high quality pipeline growth outside of the Americas.
Ensuring a consistent demand generation process in every region is an important part of our strategy to deliver broad based growth.
I would now like to highlight some great wins from the second quarter that reflect the positive momentum we have in the market.
Egyptian media group is Egypt largest media company with a range of broadcast and publisher brands within its operation.
During the quarter, yet launched watch it Egypt first dedicated Otcs service. The service is available on desktop iOS and Android devices and will provide a junction audiences access to a range of on demand programs and bills.
It also enables users to livestream linear broadcast channels as well as tuned in for live sports events like the Africa Cup of nation that took place earlier this month.
Egyptian media selected Brightcove due to the reliability of our platform.
In a positive recommendation from it systems integrator.
The Cato Institute one of the world's largest think tanks chose to replace and consolidate its existing video tech stack in conjunction with their use of drupal as part of this process caito standardized onto Brightcove and displaced a variety of other competitive players.
This consolidated stack will provide a seamless workflow that will integrate into drupal and hubspot and greatly enhance their ability to produce live content.
Maxmara one of the largest fashion houses in Europe selected Brightcove as its online video platform. This was a competitive displacement due to our superior player performance and tight integration with Salesforce Dot com.
This customer will be using brightcove to power video on the landing page of its website and for product videos as well as live streaming various fashion shows from around the world.
And a great new win for us in the sports Tech space is banned code from the house of Dream 11, India's biggest fantasy sports platform with over 70 million registered users.
Van code is a multi sport aggregator platform for the avid sports fan offering a wide spectrum of content commerce and community engagement.
Bamkos selected Brightcove video cloud and Brightcove live in order to power online video on their mobile App.
I was recently in India, and we are seeing tremendous interest from prospective customers.
The combination of low handset costs reliable broadband connectivity and a population of more than 1 billion citizens is driving rapid increases in video consumption.
According to Nielsen video streaming accounts for more than 50% of time spent on a mobile phone.
India is a key region for write code in an area, where we are making additional investments.
The highlight of the quarter was our ninth annual and largest play user conference.
Where we hosted customers partners prospects and industry, leading sponsors one of the most exciting aspects of the conference where the presentations made by more than 55 companies about their brightcove experience demonstrating the value they derive from their relationship with us and the value we provide to their video strategies.
The key theme at play was breakthrough emphasizing the critical role that video has in helping our customers.
Specifically developing stronger personal connections with their target audiences to drive higher engagement and ROI.
Incorporating cutting edge technology into their businesses and helping learned how to invoke change and take risks to advance growth.
This has been a consistent theme we've heard from our customer advisory boards customers increasingly recognize that generating engaging video content with new technology is what drives value in their business not developing and maintaining their own video delivery platform.
At play we have reviewed our entire product roadmap and vision, including the use cases and purpose built applications, we will be introducing over the next 12 months.
Customer feedback has been extraordinarily positive and demonstrates that we are targeting the most critical business issues facing our customers.
The pace and quality of innovation, clearly reestablished brightcove position as the leader in the online video space.
A great example of our innovation is the most recent version of our life product, which shipped in the second quarter.
Some of the new innovation in this release include new features and functionality for Brightcove Live Our award winning live streaming solution included in this release is a new life to social feature which enables customers to livestream directly to Facebook via the Brightcove platform and will be available for you to in Q3 life to social enables users to grow and retain viewers by live streaming content to existing audiences in social communities.
Overall I'm very proud of the work we have done to develop and execute on a product roadmap that will greatly enhance the value. We can deliver to our customers business. We are committed to delivering on this roadmap in the coming quarters by early 2020, we will have the deepest most powerful portfolio of purpose built products in our history.
Before I wrap up I would like to provide an update on our Ooyala acquisition, which closed at the beginning of the second quarter, we have gotten off to a strong start and are seeing early positive interest from these acquired customers in bright coats comprehensive and reliable platform.
We also continue to be pleased with the quality of our newly acquired employees, which is enhancing the depth and quality of our team across all functional areas.
As we move through the second half of the year, our focus will be on migrating these acquired customers onto the brightcove platform, which will enhance the customer experience and give them access to new capabilities only available through bright growth.
Summarize we made substantial progress in the second quarter setting the stage for brightcove to deliver faster consistent and predictable top line growth.
We are driving change across all aspects of the business that will increase the value brightcove delivers for our customers.
This is an exciting time for us and I am confident that we will start to see the positive impact from these changes more fully by the end of 2019.
With that let me turn the call over to Rob to walk you through the numbers were up.
Thank you, Jeff and good afternoon, everyone.
I will begin with a detailed review of our second quarter, and then I will finish with our outlook for the third quarter and the full year 2019.
Total revenue in the second quarter was $47.6 million, which was above the high end of our guidance range. The outperformance was driven by overage revenue of $1.9 million, which was above the $1.25 million target. We noted on our first quarter earnings call over just continued to be variable, but due to the strength on overages. We saw in the last two quarters, we are increasing our overage forecast for the second half of 2000 $19 million to $1.6 million per quarter.
Breaking revenue down further.
Subscription and support revenue was $44.9 million and professional services revenue was $2.7 million.
12 month backlog, which we define as the aggregate amount of committed subscription revenue related to future performance obligations in the next 12 months was $107.6 million.
This represents a 25% year over year increase.
We believe 12 month backlog is a useful metric for investors to track our performance on our strategic initiatives.
On a geographic basis, we generated 54% of our revenue in North America during the quarter and 46% internationally.
Breaking down international revenue, a little more Europe generated 17% of our revenue and Japan and Asia Pacific generated 28% of revenue during the quarter.
Let me now turn to the supplemental metrics, we share on a quarterly basis.
Our recurring dollar retention rate in the second quarter was 87%, which was below our target range of low to mid Ninetys.
Recurring dollar retention rate in the quarter reflects lower than typical upsells at the time of renewal.
Our customer count at the end of the second quarter was 3761 of which 2350 were classified as premium customers.
Looking at our ARPU within our premium customer base, our annualized revenue per premium customer was $83500, which was up 11% year over year and excludes our entry level pricing for starter customers, which averaged $4500 in annualized revenue.
Please note. These metrics include the impact from the dollar transaction.
Looking at our results on a GAAP basis, our gross profit was $26 million operating loss was $7.1 million and loss per share was 19 cents for the quarter.
Turning to our non-GAAP results, our non-GAAP gross profit for the second quarter was $26.8 million compared to $25.7 million in the year ago period and represented a gross margin of 56%.
Subscription and support revenue represented approximately 94% of our total revenue and generated a 58% gross margin in the quarter compared to a 67% gross margin in the second quarter of 2018.
The decline in gross margin is due primarily to the acquisition, which operated at a lower gross margin profile than Branco.
It is our intention to migrate to the olive customers off of that platform and onto the Brightcove platform in the second half of this year.
What that transition is complete we would expect gross margins to return to their historical levels.
non-GAAP loss from operations was $1.5 million in the second quarter compared to non-GAAP loss from operations of $1.8 million in the second quarter of 2018.
Adjusted EBITDA was a loss of $130000 in the second quarter compared to a loss of $660000 in the year ago period and above the high end of our guidance range for the quarter.
The profitability outperform was driven primarily by the better than expected overage revenue.
non-GAAP net loss per share was four cents based on 38 million weighted average shares outstanding. This compares to a loss per share of seven cents on 35.5 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 $21.1 million. During the second quarter, we used $4.1 million in cash flow from operations and free cash flow was negative $5.7 million after taking into account $1.6 million in capital expenditures and capitalized internal use software.
I'd now like to finish by providing our guidance for the third quarter and full year 2019.
For the third quarter, we are targeting revenue of $47 million to $47.5 million, including approximately $2.3 million of professional services revenue.
From a profitability perspective, we expect a non-GAAP operating income of $1.3 million to $1.8 million and adjusted EBITDA of $2.6 million to $3.1 million.
non-GAAP net income per share is expected to be in the range of two cents to four cents based on 39.7 million weighted average shares outstanding.
Turning to our outlook for the full year 2019, we are updating our revenue guidance to a range of 184 million to 186 million.
Given the strong overage revenues in Q1 and Q2, we have increased our overall forecast to approximately $1.6 million of overage revenue per quarter for the remainder of the year or $7.3 million for the year.
In terms of profitability, we are increasing our full year outlook. We now expect non-GAAP operating income of $3.3 million to $4.8 million and adjusted EBITDA of $8.7 million to $10.2 million.
In addition, we expect non-GAAP net income per share of six cents to 10 cents based on 38.7 million weighted average shares outstanding.
For cash flow, we continue to expect full year free cash outflow in a range of $3 million to breakeven.
To summarize we made good progress on our strategic initiatives to reach our goals of breakout growth and improve profitability.
We are confident the steps, we are taking will produce faster more predictable and profitable growth overtime and significant value for shareholders.
With that we will now take your questions. Operator, we are ready to begin Q ahead.
Great. Thank you at this time, we will be conducting a question and answer session.
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One moment, please pull for questions.
Our first question is from Steven Frankel from Dougherty and company. Please go ahead.
Good afternoon, Jeff first thing I'd like to focus on is that significant bump in ARPU per premium customer.
Could you characterize for me whether that was from one or two very large deals or is this more of the things you've been preaching for the last couple of quarters starting to come into play and you are getting better at executing deals of that kind of start it as a bigger number.
Across the spectrum.
Hey, Steve. This is Eric this is actually Rob I'll take the ARPU question from Jeff, but it's a combination of Q.
As long as execution on our side as Jeff mentioned in his script, we had a good increase in that new deal size in the quarter and the second piece is the customers that we brought over in the acquisition at a higher ARPU than than what we saw on our side, but we saw the growth on the organic side as long as the increase from the our customers.
Okay and could you tell us how many.
To allow our customers you brought over.
That we brought over in the neighborhood of 150.
Okay.
And I'm just trying to square your guidance with the gross margin pressure from the low yes, we should assume that.
Operating expenses.
Ticked down a little bit in the back half.
Yes, and Thats pretty pretty true historically, those ticked down as we get over black.
And we see that variable marketing spend come down.
And we also assume that as you know.
As we are working to migrate those customers off we're seeing improvements in that those margins in the back half of the year.
Okay and.
How about the Salesforce at the play you talked a lot about rapidly trying to change out as many sales positions.
As possible could you give us an update on kind of where you are number of open racks.
Hey, Steve It's Jeff.
Yes, we've made a lot of very very significant progress on.
Changing out the sales team I think the greatest example of that was EMEA as I talked about the go to market plan is working there. We did a lot of significant trade outs of talent and yet EMEA had really a fantastic quarter.
North America is slightly behind AMEA and doing those changes, but the changes are essentially now done in North America also so we're very very encouraged by that we were also pleased.
With that the activity and the close rate than our salespeople had even those who have just joined joined the company. So EMEA. The work is done and it's already showing signs of paying off North America. The work is done and we're hopeful about seeing that pay off also.
Okay, and Rob could you give us the 12 month committed backlog number a year ago.
As we have the yen.
Yes, its 32018 and 86 million.
Little over 86 $86.3 million.
Okay, Great. That's all my questions for now I'll, let somebody else have a turn thank you.
Thank you.
Your next question is from Lee Crow from B. Riley and company. Please go ahead.
Great. Thanks for taking my question guys.
Just wanted to.
Get a little bit more detail on the retention rate, obviously, a dip down.
In the opening comments, you guys kind of talked about.
Some good progress on up so but then.
Obviously with the retention rate at 87 kind of cover the different story so.
Maybe just a little bit more detail on that front would be helpful.
Yeah sure. It's surely this is Rob you know the the retention rate includes only those upsells that happened at time of renewal. So we saw some growth in the Upsells deal size, but we did not have the number of upsells on the growth in.
Renewals that we typically had at the same time that has not been essentially.
So while our grossly concentrate was in line or was that net retention rate. There wasn't shown some kind of strength we've seen in prior quarters.
Okay and then.
Is the expectation to kind of trend back up to the more normalized level or is this kind of.
Multi quarter phenomenon.
Yes, we've got we've got the change in the <unk> and the team in place, we expect our numbers to improve as the retention to start to take hold but we expect that the kind of really take foot in the six to 12 month timeframe.
Got it got it and then just on you've you've had to weigh all us now for a little over three months, maybe just kind of update on the timeline I think.
On the last call. It was about 12 to 18 months from full integration.
Also just on that front kind of notice that.
Deal related costs went from 8.1 to 8.6 million I know, it's small, but maybe just you know is that indicative of some incremental costs you discovered as you've begun to.
Combine the two businesses.
Hey, Lee, it's Jeff I'll go first and then I'll, let Rob wrap it up on the.
On the cost side.
Yeah, we're pleased with the.
The feedback that we've gotten from the re all our legacy customers, we had a breakout session for them at the play event during the quarter. It was well attended they've got to see the the our products our features or functionality and I think what was most telling was when the former Ooyala had a product two is now at Brightcove employ stood up and he said all the things I wanted to deliver for you.
While I was there two yala are now available and we literally had customers coming up saying when can I get started.
So we're moving up the timeline of adoption. We think we can move more quickly. We think it's also in the customers' best interest to get to our platform.
Which is more stable and more reliable more performance and so we're going to be more aggressive in migrating that install base.
Yeah and to your question the increase from the 8.1 to 8.5 inches as we dug in and we started looking at what is going to take to get those customers over we saw a little bit of a.
Got it and then.
With the progress you guys are making with the sales force.
Obviously, it's clear that you are seeing a quick ROI.
Are fairly quick ROI from some of these new hires.
As these guys get up to speed is there also an incremental marketing expense expense associated with.
You know kind of blocking and tackling as they go out to try and attract more deals.
I don't I mean, we are kind of hopeful that the ROI will look good normally when you. When you build these models you expect about six to 12 months.
Ramp up rate for the new hires.
Early indications are that the sales team I think through the kinds of people that they are picking and recruiting into the company and the Onboarding efforts says that that we will get them productive in the last time, I don't really see any correlation and having to increase marketing spend the marketing.
Spend is tied to our market segmentation and customer segmentation and account segmentation disciplines. Those are all things that we introduced.
Really at the beginning of this year and those those disciplines can handle the ebbs and flows of sales reps coming in and out it's more market driven.
Got it thanks for taking my question guys.
Thank you. Thank you.
And once again as a reminder, if you'd like to ask a question. It is star one.
And I see no further questions I'd like to turn the floor back over to Mr. Ray for any closing comments.
Thank you very much for those of you who dialed in thank you as we shared we're feeling good about where we are and where we're headed there is a I think a high level of energy and excitement in the company and a sense of excitement, particularly with the new products that we'll be bringing to market. Later this year for us. It's all about execution to the plan that we've shared with you and we renew that commitment to that plan. Thank you all and have a great summer.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you again for your participation.