Brightcove Inc.
Q4 2020 Earnings Call Transcript

Published: 17 Feb 2021

[Operator:]

Greetings and welcome to the Brightcove Fourth Quarter and Fiscal Year 2020 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Brian Denyeau. Thank you, Brian. You may begin.

[Brian Denyeau:]

Good afternoon and welcome to Brightcove's fourth quarter 2020 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 all of you for joining today. I hope all of you and your families continue to remain healthy and safe. The fourth quarter was an excellent finish to a terrific year for Brightcove. We delivered the strongest fourth quarter bookings performance in the company's history, driven by continued momentum across all parts of the business. We are helping drive videos’ proliferation across global enterprises, enabling better engagement with employees, customers, and partners.

[Rob Noreck:]

Thank you, Jeff; and good afternoon, everyone. I will begin with the detailed review of our fourth quarter, and then I will finish with our outlook for the first quarter and the full year 2021. Total revenue in the fourth quarter was $53.7 million, which is well above our guidance range, breaking revenue down further subscription and support revenue is $50.7 million and professional services revenue was $3 million. Subscription and support revenue in the quarter, benefited from $1.2 million of non-recurring revenue related to a live event held in the quarter and strong overages of $2.3 million. 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 $114.7 million, this represents a 14% year-over-year increase. 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 16% of our revenue and Japan and Asia Pacific generated 29% 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 fourth quarter was 91%, which was in our target range of low to mid-90s. We still have more work to do to build a consistent renewals business. As Jeff mentioned, this is a key strategic priority for us in an area we are investing significant resources. We have implemented the operational changes required, but this metric may potentially be below our target rate in the first half of the year before we feel the full impact of the changes we are making in the second half of 2021. Our customer count at the end of the fourth quarter was 3,330, of which 2,279 were classified as premium customers. Looking at our ARPU within our premium customer base, our annualized revenue for premium customer was $97,000, which was up 17% year-over-year and excludes our entry-level pricing for starter customers, which averaged $4,400 in annualized revenue. Looking at our results on a GAAP basis, our gross profit was $34.2 million, operating income was $1.6 million and net income per share was $0.05 for the quarter. Turning to our non-GAAP results, our non-GAAP gross profit in the fourth quarter was $34.8 million, compared to $29.7 million in a year ago period and represented a gross margin of 65%. We are pleased with the improvement in gross margin in the second half of the year, which reflects better cost efficiencies, improved revenue performance and the diversification of our business in the less video delivery intensive use cases. Subscription and support revenue represented approximately 94% of our total revenue and generated a 68% gross margin in the quarter compared to a 64% gross margin in the fourth quarter of 2019. Non-GAAP income from operations was $5.4 million in the fourth quarter compared to $2.2 million in the fourth quarter of 2019. Adjusted EBITDA was $6.8 million in the fourth quarter, compared to $3.5 million in the year ago period and above the high end of our guidance range for the quarter. Adjusted EBITDA margin was 13% in the quarter, an all time high and up more than 500 basis points year-over-year. Our profitability performance in the fourth quarter and for the full year or important demonstration of the scalability of our business model. Our combination of cost discipline and targeted investment in our growth initiatives positions as well to generate continued margin expansion going forward. Non-GAAP net income per share was $0.14 based on 41.6 million weighted-average shares outstanding. This compares to net income per share of $0.06 on 39.7 million weighted-average shares outstanding in a year ago period. Looking at our full year 2020 results, total revenue was $197.4 million, up 7% year-over-year. On a GAAP basis, gross profit was $121.3 million, operating loss was $5.3 million and loss per share was $0.15 based on 39.5 million weighted-average shares outstanding. On a non-GAAP basis, gross profit was $123.7 million, income from operations was $15.2 million, adjusted EBITDA was $20.5 million and net income per share was $0.36 based on 40.4 million weighted-average shares outstanding. Turning to the balance sheet and cash flow. We ended the quarter with cash and cash equivalents of $37.5 million. During the quarter, we paid down the remaining $5 million that had been outstanding on a $30 million revolving credit facility. We generated $12.4 million in cash flow from operations and free cash flow was $10.9 million after taking into account $1.5 million in capital expenditures and capitalize internal use software. This is the best quarterly cash flow performance in our history. I would like to finish by providing our guidance for the first quarter and full year 2021. As Jeff indicated, we entered 2021 with great momentum in our business. We are generating significant sales growth driven by the strength of our product portfolio and go-to-market team and the increased strategic importance of video and enterprises. We expect to have another strong sales here in 2021, so we remain mindful of the potential impact the continued uncertainty in the macroenvironment may have on customer spending and have incorporated that into our outlook. Our growth expectations for 2021 also reflects a meaningful churn that we expect to occur in the first half of the year. This is related to several legacy customers that are moving to do it yourself solutions. Altogether, these customers represent approximately $3.1 million of subscription revenue that is expected to come out of our run rate by June 30. As we have mentioned, building a strong renewals business is a key priority this year and we are confident the leadership and processes we have put in place will be successful. For the first quarter, we are targeting revenue of $53 million to $54 million, including $1.5 million of overages and approximately $3.7 million of professional services revenue. From a profitability perspective, we expect non-GAAP operating income to be $4 million to $5 million and adjusted EBITDA to be between $5.4 million and $6.4 million. Non-GAAP net income per share is expected to be in the range of $0.09 to $0.11, based on 41.9 million weighted-average shares outstanding. Please keep in mind as you look at our sequential expectations for the first quarter, that there is $1.9 million of revenue recognized in the fourth quarter, that is not in our run rates for the first quarter. For the full year, we are targeting revenue of $211 million to $217 million, including $6 million of overages and approximately $12.5 million of professional services revenue. From a profitability perspective, we expect non-GAAP operating income of $20 million to $25 million and adjusted EBITDA to be between $25.5 million and $30.5 million. Non-GAAP net income per share is expected to be in the range of $0.44 to $0.56, based on 42.2 million weighted-average shares outstanding. Our adjusted EBITDA guidance reflects the third consecutive year of annual growth. For the full year we are now targeting free cash flow of $17.5 million to $22.5 million. To summarize, we had an excellent fourth quarter, we continue to execute very well through the challenging economic environment. I believe we are well-positioned to build upon our recent successes to generate faster more profitable growth. With that, we'll now take your questions. Operator, we are ready to begin Q&A.

[Operator:]

Thank you. We will now be conducting a question-and-answer session. Our first question comes from Mike Latimore with Northland Capital Markets. Please proceed with your question.

[Mike Latimore:]

Great. Thanks. Yes, and congrats on the great execution this year.

[Jeff Ray:]

Thanks Mike.

[Rob Noreck:]

Thanks Mike.

[Mike Latimore:]

Yes. I apologize if I missed this, but did you comment on fourth quarter bookings? How that came in relative to we had in the last couple of quarters?

[Rob Noreck:]

Yes, we did. As Jeff mentioned, it was our strongest fourth quarter ever.

[Mike Latimore:]

Okay. And how much did kind of virtual live events contribute to the bookings?

[Rob Noreck:]

Yes, we don't really break it out on a product-by-product basis, but we had a good mix of virtual events, our Beacon products and then our legacy products with Video Cloud.

[Mike Latimore:]

Okay, great. And then as you think about growth this year, can you give any color on the relative contribution of say ARPU growth versus new customer adds? Any – is it going to skew one way or another here?

[Rob Noreck:]

Yes, we're not really optimizing for the customer account growth. So I think it's going to be a good combination of both as we head through the year, particularly in the back half of the year as we start seeing the benefits of our renewals business improvement

[Mike Latimore:]

Got it. And then, I guess lastly you've mentioned that the channel started to make a solid contribution, I believe, I guess, can you give more color on channel contribution report?

[Rob Noreck:]

Yes, as we talked about on the call, it was about 20% of the bookings in the fourth quarter. And as we go forward, we're trying to get that into the 30% to 50% range in the future. We believe there is real opportunity with the channel to grow the business, and reach markets that we might otherwise not with our direct sales force.

[Mike Latimore:]

Okay, great. I guess just lastly, largest customer is still about 2%.

[Rob Noreck:]

Yes, that’s right.

[Mike Latimore:]

Okay, great. Thanks. Good luck this year.

[Rob Noreck:]

Thanks.

[Jeff Ray:]

Thanks, Mike.

[Operator:]

Thank you. Our next question comes from Steven Frankel with Colliers. Please proceed with your questions.

[Steven Frankel:]

Hi, good afternoon and congratulations on – a great way to finish the year. Obviously, retention rate was surprisingly strong in the quarter after the cautious language you’d given the last couple of quarters. Could you give us some insight as to whether that was driven by some big upsells or what's the dynamic there that led to the outperformance? Or is it just a timing issue when the things you were worried about are now happening in Q2 and not in Q4?

[Jeff Ray:]

Yes, with some timings and just some mix and the ability of the team to upsell. But as I’ve said, I'm not going to feel good about the predictability and the consistency of our renewals until we get into the second half of this year. That's what I believe we will have this under control.

[Steven Frankel:]

Okay. And then a big step up in ARPU, which was another thing that pops out in the quarter, is that driven by a couple of large deals in particular? Or is that just the way the team is executing now that these engagements are more meaningful than they were six months or nine months ago?

[Rob Noreck:]

Yes, Steve, that's really driven by one large deal in the quarter, in the script, we talked about the $1.2 million of revenue in the quarter from a live event and that's really what's pulling that ARPU up.

[Steven Frankel:]

Okay. And then you the Rule of 30, is that something you still desire to do by that March deadline that you have, or do you think it takes you longer to get there?

[Jeff Ray:]

It's a – absolutely it's our goal, I don't believe that we deserve the right to say we're a high-performing SaaS company until we cross that, and then pursue the next target. I'm not going to put a date on it, but as I've said all along we're treating that with the greatest level of urgency. We pay attention to it when we put our business planning together and our investment strategy with an eye towards, as we've said over and over again, profitable growth. We believe that we can solidly grow the top line and we can do it in a very profitable way by presenting solutions for which customers see the value and will pay a premium. It is now starting to pay off and we're not going to turn back.

[Steven Frankel:]

Great. You're executing really well. And then do you see any meaningful change in your mix between media and enterprise customers as we go through this year and into next year? Or are you indifferent as to where the customer comes from?

[Jeff Ray:]

Well, I don't – I wouldn't call it indifferent. I love all our customers. And there's awesome opportunity in media, as well as in enterprise. The power of media and I think sometimes it gets a bad rap because there is a move in giant media to do more DIY, we've been living with that, and we're not out of the woods yet, but the power of media is they demand broadcast quality. And so as a result, it's in the DNA of the technology stack. It's how engineering and product define the core attributes of new features and functionality that we're going to deliver. We're going to deliver almost 200 new features and functions this year. That's what the product roadmap says. And over and over again, everything is done with a goal towards high performance, scalability while still protecting privacy and protecting our customer's IP. So we love both aspects of the business and the unique demands from both sets of customers.

[Steven Frankel:]

Great. Thank you.

[Jeff Ray:]

Thank you.

[Operator:]

Thank you. Our next question comes from Eric Martinuzzi with Lake Street Capital Markets. Please proceed with your question.

[Eric Martinuzzi:]

Hi, congrats on the quarter as well. Had a question about your outlook for the pro services revenue. I've been modeling that at about $10 million a year and it looks like at least for Q1, we've got $3.7 million and then you're looking at $12.5 million for the year. Wondering if you could give me a little bit more detail on what's going on with pro services.

[Rob Noreck:]

Yes, so two things. In the first quarter, it’s really related to one large deal that we closed, that's going to be delivered this quarter. And then as you think about professional services on a go-forward basis while it's not the core component of what we do. We are a SaaS business, but we do believe that professional services allows us the opportunity to get into the customers, know the customers and become stickier with the customer. So I expect it to increase a little bit as we grow the overall business.

[Eric Martinuzzi:]

Okay. Okay. And then go into the gross margins. Curious to know if there's any change there, I think historically you've talked about, kind of shooting for a 10% on the pro services, and then I think it was 66 or a little higher on the Software-as-a-Services. What are you thinking about for the year on gross margins?

[Rob Noreck:]

Yes. So on the professional services side, we're thinking low to mid-teens from a margin standpoint. As we've talked about, that is an area that when Jeff and I started wasn't being run profitably, we are going to continue to run that profitably, but we don't see it as a huge margin driver, as I talked about our purpose with professional services, getting into the customer and make them sticky. From the subscription side, as you saw, we are closer to 68 this quarter, that's going to be volatile, as we go through the year. As you can imagine, some of our COGS are on the usage base side, depending on how the customers leverage the platform may skew that a point or two here or there. So we do expect that to stay in above that 65 range, but it's going to be a little volatile as we go through the year.

[Eric Martinuzzi:]

Got it. Thanks for taking my questions.

[Rob Noreck:]

Thanks Eric.

[Jeff Ray:]

Thanks Eric.

[Operator:]

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

[Jeff Ray:]

Thank you, Paul. And thank you everyone for your support in us and belief in us. It really came together in the fourth quarter. We carry that momentum forward. I also want to just stress that no one inside this company is complacent or feels like now we have achieved success and we can relax and cruise. If anything, this is a stronger call to action. So you're going to see that our focus on doing things with even greater urgency. I appreciate your support and we are very excited about the New Year. As always, we ask you to continue to stay safe and stay healthy as we get through this pandemic together. Thank you all. Goodbye.

[Operator:]

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Have a wonderful evening.