Brightcove Inc.
Q2 2021 Earnings Call Transcript

Published: 28 Jul 2021

[Operator:]

Greetings. Welcome to the Brightcove Second Quarter 2021 Earnings Call. At this time, all participants are in a listen only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I’ll now turn the conference over to your host, Brian Denyeau from ICR, you may begin.

[Brian Denyeau:]

Good afternoon and welcome to Brightcove's second quarter 2021 earnings call. Today, we will discuss the results announced in our press release issued after market close. With me on the call are Jeff Ray, Brightcove's Chief Executive Officer; and Rob Noreck, Brightcove's Chief Financial Officer.

[Jeff Ray:]

Thanks Brian and thanks to everyone for joining today. I hope you and your families are enjoying a safe and healthy summer. Our customers continue to demonstrate that video remains the most powerful medium to connect with their audiences. As many global organizations begin to plan for hybrid working environments, we see the opportunity to empower them to communicate, educate, motivate and inspire their teams across a variety of industry sectors. We are also ready to serve the needs of marketers, as they are presented with the challenge to optimize all video content across a variety of activities, both in person and virtual. And we are so proud to continue to deliver solutions to media companies that are enabling greater reach and monetization of content across various engagement models.

[Rob Noreck:]

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 2021. Total revenue in the second quarter was $51.5 million, which is above our guidance range. Breaking revenue down further, subscription and support revenue was $48.6 million and professional services revenue was $2.9 million. Revenue benefited from higher than expected overages of $2.1 million in the corner. 12 months backlog which we define as the aggregate amount of committed subscription revenue related to future performance obligation in the next 12 months, was $119.8 million. This represents a 10% year-over-year increase. On a geographic basis, we generated 57% of our revenue in North America during the quarter and 43% International. Breaking down international revenue a little more, Europe generated 19% of our revenue in Japan and Asia-Pacific generated 24% of revenue during the quarter Let me now turn to the supplemental metrics we share on a quarterly basis. Recurring dollar retention rate in the second quarter was 86%, which was below our target range of low-to-mid 90s. As we previewed in earlier earnings calls, we had two large media customers downgrade or churn in the quarter. As you know, we have historically calculated our recurring dollar retention rate, based on those customers up for renewal in the current quarter. This approach has some significant drawbacks, namely that it includes a relatively small sample size, and only captures up-sells at the time of renewal. This leads to substantial swings in quarterly retention that make discerning underlying trends challenging. To better align our reporting with most leading SaaS companies, this quarter, we are introducing a new metric net revenue retention, which we will report on a quarterly basis going forward. We calculate net revenue retention, by comparing the current annualized recurring revenue, to the annualized recurring revenue from 12 months prior for those premium customers that existed 12 months prior. This new metric will provide better insight into our retention and up-sell efforts, and make our retention more comparable to peers companies. We have posted a schedule showing historical net retention rate back to the first quarter of 2019, on the Investor Relations section of our website. We will continue to provide our existing recurring dollar retention rates through the end of 2021, as well for compatibility. With that said, net revenue retention in the quarter was 98%, which compares to 99% in the first quarter of 2021 and 92% in the second quarter of 2020. Since the beginning of 2019, net revenue retention has ranged from 92% to 100%. As Jeff mentioned, completing the process of rebuilding our renewal business is our top strategic priority. And we made substantial progress in the second quarter. There's a natural lag between when these changes are implemented, and when they begin to positively impact our retention rate. As we continue to make improvements in our renewals business. We expect this metric overtime to be consistently over 100%. Our customer count at the end of the second quarter was 3,263 of which 2,280 were classified as premium customers. Looking at our ARPU within our premium customer base, our annualized revenue for a premium customer was $92,000 which was up 6% year-over-year and excludes our entry level pricing for starter customers, which averaged 4,500 in annualized revenue. Looking at our results on a GAAP basis, our gross profit was $34.2 million, operating income was $590,000 and net income per share was $0.2 for the quarter. Turning to our non-GAAP results, our non-GAAP gross profit in the second quarter was $34.9 million, compared to $28.6 million in the year ago period, and represented a gross margin of 68%, which is up nicely from the 60% in the second quarter of 2020. Subscription and support revenue represented approximately 94% of our total revenue and generated a 71% gross margin in the quarter compared to a 62% gross margin in the second quarter of 2020. Non-GAAP income from operations was $4.2 million in the second quarter compared to $3.1 million in the second quarter of 2020. Adjusted EBITDA was $5.6 million in the second quarter compared to $4.2 million in the year ago period and above the high end of our guidance range. Adjusted EBITDA margin was 11% in the quarter. Non-GAAP diluted net income per share was $0.11 based on 42.2 million weighted average shares outstanding. This compares to net income per share $0.07 on 40 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 $40.4 million. We generated $8 million in cash flow from operations and free cash flow was $5.7 million, after taking into account $2.3 million in capital expenditures and capitalized internal use software. I would like to finish by providing our guidance for the third quarter and full year 2021. For the third quarter, we are targeting revenue of $50.5 million to $51.5 million, including $1.5 million of overages and approximately $2.7 million of professional services revenue. From a profitability perspective, we expect non-GAAP operating income to be $0.5 million to $1.5 million and adjusted EBITDA to be between $1.7 million and $2.7 million. Non-GAAP net income per share is expected to be in the range of $0.01 to $0.03 based on 42.4 million weighted average shares outstanding. For the full year, we are revising our full year outlook. We are now targeting revenue of $211 million to $213 million, including $7.4 million of overages and approximately $12.5 million of professional services revenue. From a profitability perspective, we are expecting non-GAAP operating income of $14 million to $17 million and adjusted EBITDA to be between $19.1 million and $22.1 million. Non-GAAP net income per share is expected to be in the range of $0.30 to $0.37 based on 42.3 million weighted average shares outstanding. For the full year, we're now targeting free cash flow of $7 million to $10 million. As you consider our guidance, the biggest drivers who are change in outlook are the challenges related to our renewals. This is a combination of churn being somewhat higher in the first half of the year and the pace of recovery somewhat slower in the second half. We have completed the steps necessary to put the renewals business on the right path. We expect the renewals business to be a meaningful driver for growth in 2022. We believe that accelerating revenue growth is the best way to drive long-term value for our shareholders. In order to take advantage of the market opportunity in front of us, we will be increasing our investments in sales and marketing in the second half of the year. We have consistently demonstrated our disciplined approach to spending and our ability to scale the business. This approach gives us the confidence to make these strategic growth investments at this time. To wrap up, Brightcove delivered another strong financial performance in the second quarter. While we continue to work through improving our retention rates, we're executing against our strategic priorities and increasing the value we deliver to our customers. We look forward to sharing the product announcements Jeff mentioned at play. We believe this positions as well to drive even better top and bottom-line performance as we continue to make progress towards our goal of being a Rule of 40 Company. With that, we'll now take your questions. Operator, we are ready to begin Q&A.

[Operator:]

At this time, we will have our question-and-answer session. And our first question is from Eric Martinuzzi with Lake Street. Please proceed with your question.

[Eric Martinuzzi:]

The outlook from the renewal -- the retention perspective, Robbie just finished talking about the churn a little bit higher the first half and the recovery a little bit slower in the second half. But, as we go back 90 days to that existing guidance or to the previous guidance where we're talking about kind of a midpoint is $214 million. And now we're looking at the midpoint, a couple million below that. Was the churn that much greater than you would have thought. Are you just being more conservative on the recovery being slower? What's the bigger driver of that that midpoint reset?

[Jeff Ray:]

Yes. The bigger driver the midpoint reset is really around the recovery being slower. As we looked at the second quarter, we were pretty close to where we thought we were going to be for the second quarter. And it's really the back half of the year.

[Eric Martinuzzi:]

Okay, because that's what I signed. I know Q1, we had a bit of a surprise on a couple of media accounts. Q2, we already kind of knew about as far as the retention exposures, but -- okay. And then…

[Jeff Ray:]

And Eric, just real quick, as I mentioned in the prepared remarks, it does tend to focus on the media side where we're seeing that slower recovery. We're really comfortable with where we are on the enterprise side of the business. And what we're seeing there the retention rates.

[Eric Martinuzzi:]

Okay. And that recovery being slower on the media side, what is it -- is it COVID-related? Is it competitive landscape issue? Is it budgetary? What's driving the foot dragging?

[Jeff Ray:]

Yes. It really tends to be those large media customers that continue to explore that do-it-yourself type infrastructure. And as we've talked about over the last couple of quarters, we're really weighing down the number of large customers that we have that has fit that profile. The new business that we're selling on the media side is much stickier as we're selling in the apps to solve the business problems like beacon into the media customers versus just the video delivery that some of the larger customers will be willing to take in-house.

[Eric Martinuzzi:]

Okay. And then, just one more on the outlook. The implied number for the fourth quarter, I'm coming out with roughly $54 million, that's kind of the sum of the first half of the year, and then subtracting the midpoint Q3 guide. And then -- that seems like a pretty substantial step-up roughly $3 million by my math. And what's behind that step up Q3 to Q4 that overages driven? Is that pipeline map? What's the state?

[Jeff Ray:]

So, from overages standpoint, we're still forecasting the 1.5 per quarter. So, that's in both Q3 and Q4. So it's really based on what we're seeing in terms of anticipated sales performance and retention performance in the third quarter.

[Eric Martinuzzi:]

Got you. Okay. Thanks for taking my question.

[Operator:]

And our next question is from Steven Frankel, with Colliers. Please proceed with your question.

[Steven Frankel:]

Good afternoon. Look, I want to go back at the same issue, as it is the issue and just dig in a little deeper. So, when you're saying slower recovery, are you saying churn in the back half is going to be a little higher than you expected, because someone -- you have customers that are thinking about going DIY, is that specifically what you're hearing on the back half of the year that's leading to this reduced guidance?

[Jeff Ray:]

Hey, Steven, it's Jeff. We have more in, so you'll recall, we put out a pretty strong message years ago that, on the sales side, we were going to improve the quality of the forecasting, the integrity of all of that, so that we do a better job on our guidance. We now have a lot more insight into our renewals out, out beyond the current quarter, the current periods than we had before. And that's really the result of all the things that we've implemented to focus on renewals. And so, when we look at that, that gives us a better sense of where the risk is and where we want to be very conservatively in this. It doesn't take into account the fact that the renewals team now has earlier insight and is actually intercepting at an earlier stage and working to save those. But we just need to see a couple of quarters of those actions actually paying off to know that, yes, indeed, when we do these three things, the risk of losing the customer goes down this percentage. So we just need to see that for a couple of quarters to say, okay, the machinery is now working. And we feel better about where we're going.

[Steven Frankel:]

Okay. And then on this notion of investing in sales and marketing, could you kind of break that down into how much of this is headcount driven, which will take a while to become productive, versus maybe spending money in new and different ways to try to accelerate revenue growth?

[Jeff Ray:]

Yes. And Steve, it’s the second one that we're really focused on, there's not a ton of headcount additions that are over and above what we had in the original guide. It's much more on the demand generation side and focused demand gen, where we're seeing those opportunities in the market, to really accelerate that bookings growth and the revenue growth in the future.

[Rob Noreck:]

Yes. PLAY this year is October 5 and 6. It's virtual event. And we intend to do some pretty good product rollouts. And so we want to make sure that we're not choking or holding back the demand gen machine for going after those new businesses.

[Steven Frankel:]

Okay. And where do you think you are in the journey to raise premium ARPU. Are we plateauing here for a while until some of those new products come out later next year? Is that the way we should think about it?

[Jeff Ray:]

Yes. No. I think, I understand that we -- sequentially, we were down quarter-over-quarter from Q1 to Q2. But that's a function of some of those large media customers that we had already identified churning out. If you think about it, we're still improving that year-over-year. We're up 6% year-over-year. We think that we still have a lot of green space in our existing customer base to continue to sell our existing products. We don't need to wait for the new products that we're going to be talking about at PLAY. That said, when we do start launching those new products that's going to open up even more opportunity for us, both on our existing customer side, but then also with new logos.

[Rob Noreck:]

The other thing that gives us comfort is, most of the upside in the ARPU was really driven by North America over the last couple of years. And so, now we're applying those same kinds of best practices to the rest of the world. So we see some good upside potential, as we start to implement those. We know it works. It's worked very well here. And now we need to export that.

[Steven Frankel:]

Okay. And last question, other than the Rick departure? Has there been any meaningful turnover in sales ranks during the quarter?

[Jeff Ray:]

It’s a great question. And we certainly have been vigilant watching it, just because I mean, there is so much noise out there, about people are jumping as they come out of COVID. And we're just not seeing it right now. We're paying very careful attention to it. We're touching everybody. But at this point in time, we are not seeing it.

[Steven Frankel:]

Okay. Thank you, Jeff.

[Jeff Ray:]

Thank you.

[Operator:]

And our next question is from Mike Latimore with Northland Capital Markets. Please proceed with your question.

[Mike Latimore:]

Great, thanks. Yes. On the Salesforce itself were they at full productivity in the quarter?

[Jeff Ray:]

Pretty much, and we had a -- we have we -- there's always some number of openings, but it's not a number that we think is negatively impacting our ability to go win and engage.

[Mike Latimore:]

Got it. Okay. And then in terms of the revenue retention process, you obviously, do the consulting -- you have consulting last year, you hired a head of the group earlier this year, I guess, are all the changes in place now, for revenue retention processes, or it's just a matter of, executing them? Or do you think there might be additional changes in terms of the revenue retention process for your own product?

[Jeff Ray:]

Mike, I'm pleased with what this team has done. We're actually ahead of plan on implementing all of the changes. And I give credit to Deb and her team on how aggressively they're going after it. And I'm also pleased with just the really the broad expanse of the things that they're doing all aspects of this. And a great example, as I noted a couple of minutes ago was TV New Zealand, TVNZ have been talking to us for some time about components of DIY, or downsizing their relationship with us. They had always been a one year renewal customer for the last 10 years. And with a lot of the new things that the team has put in. We were very pleased to see that they didn't renew for a year they renewed for two years. That's how convinced they are that they were the right partner for them. So great, let's scale that up and aggressively go after all of our other major media and quite frankly, enterprise customers, because it's not unique to media. The same things that we're doing for media, we can be doing for enterprise.

[Mike Latimore:]

Okay. Got it. And on the enterprise side of things, how would you characterize the pricing environment there? I mean, I guess ARPU are growing year-over-year, but is pricing, stable is getting more aggressive? How do you think about it on the enterprise side?

[Rob Noreck:]

Yes. On the enterprise side is stable, and we're still able to capture price increases year-over-year, we're not seeing any dramatic price pressure on the enterprise side.

[Mike Latimore:]

Great. And then -- and just last on, it sounds like you're going to invest more in demand gen going forward, I guess. How is the pipeline built over the last quarter? How demand gen has been here today?

[Rob Noreck:]

Yes. We're early in that. We really started over investing in the second quarter. As we started to see the opportunity, we expect those investments to start paying off. So as we've talked about, over the last couple of years, we've really implemented a disciplined approach to how we look at our investments. So as we start seeing those investments we made in the second quarter payoff, we'll double down in those areas. And we'll pull back on those areas, where we're not seeing the necessary returns. We also, I'm impressed with the level of precision that the marketing team has now, versus six months, much less a year ago. In the past, we had identified growth segments we were investing, in demand gen activities. We actually now knows sub segments within those segments, that are getting the most immediate traction. So the spending, I think is more precise and more surgical, because we know that the ROI is going to be better.

[Mike Latimore:]

Okay, great. Thank you.

[Jeff Ray:]

Thank you.

[Operator:]

And we have reached the end of this question-and-answer session. I'll now turn the call over to CEO, Jeff Ray for closing remarks.

[Jeff Ray:]

Thank you, Operator. Thanks, everyone, for joining us. I do want to reiterate, October 5th and 6th is really important. And so I encourage you to sign-up and join us for play. It's going to be a very, very different event. We're very excited about the new product pipeline activity. We're very excited about, how we can make better use of AI and ML. And there's a few other things that, that we're eager to show. We're also encouraged by the fact that, some pretty big leading customers are working with us on these things. And that gives us a high level of confidence, in the direction that we're taking this company. I hope you continue to be safe. And your families do well. And I look forward to talking with you in the near future, it's not beyond. Thanks, everyone. Have a good day.

[Operator:]

This concludes today's conference. And you made disconnect your line at this time. Thank you for your participation.