Brightcove Inc.
Q4 2023 Earnings Call Transcript

Published: 22 Feb 2024

[Rob Noreck:]

Good afternoon and welcome to Brightcove's Fourth Quarter and Full Fiscal Year 2023 Earnings Presentation. Today we'll discuss the results announced in our press release issued after the market closed. During today's presentation, we will make statements within [indiscernible] business that may be considered forward-looking and are made pursuant to the Safe Harbor provisions Private Securities Litigation Reform Act of 1995 including statements concerning our financial guidance for the first fiscal quarter of 2024 and full year 2024, expected profitability and free cash flow, our position to execute on our go-to-market and growth strategy, our ability to expand our leadership position, our ability to maintain and upsell existing customers, as well as our ability to acquire new customers. Forward-looking statements may often be identified with words such as we expect we anticipate, upcoming or similar indications of future expectations. These statements reflect our views only as of today and should not be reflected upon as representing our views of any subsequent date. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations, including the effect of macroeconomic conditions currently affecting the global economy. For a discussion of material risks and other important factors that could affect our actual results, please refer to those contained in our most recently filed annual report on Form 10-K and as updated by our other SEC filings. Also, during the course of today's presentation, 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 closed today, which can be found on our website at www.brightcove.com.

[Marc DeBevoise:]

Thank you for joining. I'm Marc DeBevoise, CEO of Brightcove; and with me today is Rob Noreck, Brightcove's CFO. We're pleased to be streaming this to you via our Video Cloud platform to discuss our fourth quarter and full year 2023 results, provide an update on our strategic progress, and share our view on our future. I'll begin with a quick overview of the strong financial results we delivered in Q4, which were above the midpoint of our guidance range. Revenue for Q4 was $50.2 million, up 2% year-over-year and above the midpoint of our guidance. Adjusted EBITDA was $5.5 million, up over 3x year-over-year, delivering our second consecutive quarter of double-digit adjusted EBITDA margins and near the high end of our guidance. And we generated $1.4 million in free cash flow, while delivering over $2 million in cash to the balance sheet. I'm very pleased we delivered on expectations in Q4, return the company to top line growth in the near-term, and did that while driving meaningful adjusted EBITDA, adjusted EBITDA, margins and cash flow. Our priority is to continue to focus on the things that we can control. That means, first and foremost, being disciplined on expenses and generating consistent, substantial adjusted EBITDA, and free cash flow. Our Q4 results are a good indication of our inherent scalability and efficiency. Building upon our recent profitability is one of our primary goals for 2024. As Rob will detail later, we expect to grow adjusted EBITDA by 25% and convert 40% to 50% of that into free cash flow in 2024. We're also pleased to have returned to top line growth in the quarter. Our revenue grew 2% year-over-year and revenue excluding overages was even better, up 3% year-over-year as overages hit their lowest point since 2012. We believe evaluating our top line performance, excluding overages, is the most helpful way for investors to evaluate our progress. Looking at our 2023 performance, there were some clear positive trends for our future. We drove a meaningful increase in new business, up approximately 55% year-over-year. We did this by delivering larger new deals with average annual contract values on new business up over 200% year-over-year. We saw continued strength in the Americas where we are furthest along in executing our strategic priorities. And our success in media was clear with large strategic deals like Yahoo! and the NHL, and we believe we can build on that given our best-of-breed solutions. We also saw similar new business strength in enterprise signing numerous larger new business wins throughout the year. And with more use case specific solutions, we are confident we can grow larger, more strategic customer relationships. We were successful in our move to super serve larger and higher-value customers and saw average annual contract values increase 5% year-over-year and ARPU rise 8% year-over-year. Lastly, we executed more multiyear deals than ever, up over 25% year-over-year, which will pay-off long-term with a more secure recurring revenue base and is demonstrated in our total subscription backlog growth up meaningfully at nearly 20% year-over-year to its highest point in our 20-year history. All of these are great indicators of our value and for our long-term business. And as you can tell, we were especially pleased with our new business performance in 2023 and how it validates our focus areas in terms of both product and go-to-market. New business will ultimately be the foundation upon which we build consistent top line growth over time. We're also seeing growing traction in specific end markets. For example, in Q4, we had strong new business performance in our sports vertical, adding meaningful new logos, including PGA of America, Moto America, and the Saudi Pro League. Brightcove was chosen because we help these companies scale their streaming capabilities from fan engagement activities, all the way to streaming major national and global live events. Our Q4 wins expand our sizable sports customer base. In Q4 alone, in addition to these new logos, we signed renewals or add-on business with the NHL, MLS, F1, and the LPGA. We also support Rogers Communications in Sky Mexico, which are large multichannel distributors, both of them renewed or added business with us in this quarter, and many of their executions are in sports as well. I'm excited about our traction here and the potential for our future in this vertical. While new business was strong in 2023, overage declines and lower add-on sales were and remain headwinds. Overage declines were one of our largest issues in terms of growth in 2023, delivering a $7 million drag to revenue this year. Overages will always be a part of our business, but we believe the steps we've taken to restructure this unpredictable part of our business by bringing contractual entitlements more in line with actual usage and engaging in more multiyear agreements, will minimize its risk to our growth going forward. Overage declines are expected to be a much smaller $1 million to $2 million headwind in 2024, a meaningful improvement year-over-year. While lower add-ons were a significant headwind in 2023 as well, we are hopeful those will begin to abate over the course of 2024. This hope is based on some early signs of improvement in Q4. We have shifted our focus to developing non entitlement upgrade paths to drive add-on business in addition to more historically typical entitlement growth. We specifically saw two indicators in Q4

[Rob Noreck:]

Thank you, Marc, and good afternoon, everyone. I'll start by saying thank you to Marc, the entire team at Brightcove and the Brightcove Board for an incredible run with the company. As Marc mentioned, I'll be stepping down in Q2, but I will be here to manage this transition smoothly. I'm incredibly supportive of the management team we have here, and I believe deeply in their ability to execute, all of which makes this the right time to affect this transition. So, with that said, I will begin with a detailed review of our fourth quarter and finish with our outlook for the first quarter and the full year 2024. Total revenue in the fourth quarter was $50.2 million, above the midpoint of our guidance range. Please note that our guidance included approximately $1 million for a live event that was subsequently canceled towards the end of the quarter. Breaking revenue down further, if we exclude overages of $900,000 in the quarter, revenue was $49.3 million, up 3% year-over-year. Subscription and support revenue, which includes overages, was $47.8 million and professional services revenue was $2.4 million, flat and up 54%, respectively. 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 $127.3 million. This represents a 6% year-over-year increase. Total backlog was $183 million, up 19% year-over-year and our highest total backlog ever. We continue to see success shifting the mix of our new business and renewals towards multiyear contracts. This is positively impacting our total backlog and improving the predictability of the business. On a geographic basis, we generated 60% of our revenue in North America during the quarter and 40% internationally. Breaking down international revenue a little more, Europe generated 17% of our revenue, and Japan and Asia-Pacific generated 23% 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 95% and which compares to 93% in the third quarter of 2023 and 94% in the fourth quarter of 2022. This is largely in line with recent quarters and continues to reflect the impact from the lower add-on sales performance in the year. We expect that as we continue to expand our add-on sales capabilities, make improvements in our renewal business and increase our focus on multiyear deals, this metric will improve over time. Recurring dollar retention rate in the fourth quarter was 94%. The improvement in recurring dollar retention rate over recent performance was driven by a strong underlying gross retention rate. As we continue our strategic focus on multiyear deals, this metric continues to become less meaningful as it only captures renewals in the quarter and upsells at the time of renewal and does not factor in the impact of multiyear deals. Our customer count at the end of the fourth quarter was 2,559 of which 2,028 were classified as premium customers. Looking at our ARPU within our premium customer base, our annualized revenue per premium customer was $96,200 and excludes our entry-level pricing for starter customers, which averaged $3,900 in annualized revenue. This is up 8% compared to $89,000 in the fourth quarter of 2022. Looking at our results on a GAAP basis, our gross profit was $30.8 million, operating loss was $2.3 million, and net loss per share was $0.06 for the quarter. Turning to our non-GAAP results. Our non-GAAP gross profit in the fourth quarter was $31.6 million compared to $30.7 million in the year ago period and represented a gross margin of 63% compared to 62% in the year ago period. Non-GAAP operating income was $2.1 million in the fourth quarter compared to non-GAAP operating loss of $1.4 million in the fourth quarter of 2022. Adjusted EBITDA was $5.5 million, representing an adjusted EBITDA margin of 11% and a 366% increase year-over-year and above the midpoint of our guidance range. This is our second consecutive quarter of double-digit EBITDA margins, driven by the cost savings initiatives we have implemented over the course of the year. Non-GAAP diluted net income per share was $0.04 based on 43.6 million weighted average shares outstanding. This compares to a net loss per share of $0.02 on 42.2 million weighted average shares outstanding in the year-ago period. Looking at our full year 2023 results. Total revenue was $201.2 million compared to $211 million in 2022. Please recall that the majority of this year-over-year decline is related to a decrease in our overage revenue which decreased $7.4 million from $12.2 million in 2022 to $4.8 million in 2023. On a GAAP basis, gross profit was $123.8 million. Operating loss was $21.6 million and net loss per share was $0.53 based on 43.1 million weighted average shares outstanding. On a non-GAAP basis, gross profit was $127.1 million. Loss from operations was $693,000, adjusted EBITDA was $11.9 million, and net loss per share was $0.04 based on 43.1 million weighted average shares outstanding. Turning to the balance sheet and cash flow. We ended the quarter with cash and cash equivalents of $18.6 million. We generated $4.2 million in cash flow from operations and free cash flow was $1.4 million after taking into account $2.8 million in capital expenditures and capitalized internal use software. I would like to finish by providing our guidance for the first quarter and the full year 2024. For the first quarter, we are targeting revenue of $49 million to $50 million, including approximately $800,000 of overages and approximately $2.4 million of professional services revenue. From a profitability perspective, we expect non-GAAP operating income to be between breakeven and $1 million and adjusted EBITDA to be between $4 million and $5 million. Non-GAAP net income per share is expected to be in the range of a loss of $0.01 to income of $0.02 and based on 44.2 million weighted average shares outstanding. For the full year, we are targeting revenue of $195 million to $198 million, including $3.2 million of overages and approximately $9 million of professional services revenue. From a profitability perspective, we expect non-GAAP operating loss of $3 million to $1 million and adjusted EBITDA to be between $14 million and $16 million. Non-GAAP net loss per share is expected to be in the range of $0.10 to $0.05 based on 45.6 million weighted average shares outstanding. For the full year, we expect our adjusted EBITDA to convert to free cash flow at between 40% and 50%. Our free cash flow will be between $5.6 million and $8 million for the year. Due to typical seasonal impacts and $1.5 million to $2 million in restructuring expenses, we expect this to be negative in the first quarter and then turn to a positive free cash flow each of the following three quarters. There are a few things to keep in mind with regards to our guidance. First, we expect to see a sequential decline in revenue in the second quarter due to an expected M&A-related customer loss in Asia in Q1. Second, given the longer sales cycles on a large deal pipeline, the lack of a meaningful new channel partner and our uncertainty around the timing of recovery of our add-on business, our guidance does not assume a meaningful contribution from these initiatives. We remain confident they will positively impact the business over time, but we do not currently have line of sight on the timing. Third, we expect expenses to be down year-over-year as we realize the full benefit of the cost actions taken in 2023 and early this year. Expense linearity will be a little different this year as we expect to see a step up in Q2 due to delaying the timing of annual salary increases and other expenses. As a result, profitability will be seasonally better in the first quarter and seasonally lower in the second quarter and beyond. Lastly, free cash flow will benefit from a continued reduction in CapEx and capitalized software. We had elevated capitalization in 2023 related to product initiatives and our ERP upgrade. We now expect CapEx and capitalized software to consistently be lower than $3 million per quarter and to be approximately $10 million in 2024, down from $15 million in 2023. To wrap-up, Q4 was a solid finish to the year. We delivered revenue growth, double-digit adjusted EBITDA margins and positive free cash flow. We are progressing well against many of our strategic initiatives, which will benefit the business over time. We are committed to delivering significant profitability and free cash flow improvement this year, while we continue to invest in the future. With that, we will now take your questions.

[A - Rob Noreck:]

[Indiscernible] Securities.

[Steve Frankel:]

Hi good afternoon. Rob, you hinted a little of this in your remarks, but I just wanted to dig into the disconnect between a 6% increase in 12-month backlog and guidance that implies like a 3% decline in subscription revenue, even if you ex out averages. So, what's behind that? What's your confidence level in being able to win some of this business in the pipeline? And when do we get to it?

[Rob Noreck:]

Yes, sure. And I think as you think about it, the big piece of the guide is the material loss in Q1 due to M&A activity. And then as I mentioned in the script, we've got the large deal sales pipeline, the channel partnership and the rebound of the add-on business that we're taking a little bit of a view of not trying to guess the timing when those are all going to impact the P&L. Now, as you think about it, we've certainly got a number of large deals in the pipeline, and we're confident that some of those deals will close. As we've seen over the last few quarters, though, the timing of that is hard to gauge as we look into the market.

[Steve Frankel:]

Okay. And so you fundamentally believe this is a growth business, I guess, what you're saying, but you haven't been able to prove it. Does the -- Marc's been at this a while, does there come to a point where maybe you need to pivot to let's drive even harder for margins and worry less about growth and just trying to keep revenue flat?

[Marc DeBevoise:]

Yes, understood, Steve. I think we believe we can grow the business with the existing team, infrastructure and type of company that we have. We're in a growth market. We should be growing. We're hitting the part of the market we believe we can grow best at, right, the larger part of both the enterprise and media market. So we feel strong that we're in the right place. That new business growth was very real this past year. It's the existing customer base that we're really managing through, especially the $7 million plus decline from overages. I mean that was 80% -- roughly 80% of the decline this past year. So, I think our belief is -- let's make sure we are correctly sized to manage the business as it is, right? Let's assume it's roughly flat, but strive for growth in those right areas, and my belief is that we will get there. So, as you said, I've been here almost two years, certainly believe we have the capability to grow the business over the long-term. We're just challenged to call the exact moment at which we make that turn.

[Steve Frankel:]

And you've said for the last couple of quarters that you have seen some good progress in the North American sales force, waiting for that to happen elsewhere. Is that lack of progress with some of these other geographies, economic related? Or do you think there are processes that just haven't been implemented the right way in these other--?

[Marc DeBevoise:]

Yes, I think it's a little bit of both, Steve. I think we did have some economic factors in 2023, but we also had operational changes we needed to make. I think we've now made those. We have hit this year, I would say the most correctly staffed that we have been since I got here, and correctly, might be the wrong word, but we feel like we have the right teams in place in the right places coming into this Q1 more so than we did coming into last year. And so I feel good about that change to the Hunter the Hunt Rivers farmer sort of model that we have. We have a great new CRO, great new CMO. They're about 40 days in at this point. But I can already tell the energy and the focus is there. So, I'm excited about what we can do together. And I feel like we are sort of poised in each of the territories to make some real progress this year. As opposed to last year, I think we struggled in a couple of those territories over time.

[Steve Frankel:]

Okay. Thank you. I'll jump back into the queue.

[Marc DeBevoise:]

Thanks.

[Rob Noreck:]

Thanks, Steve. We'll now take questions from Eric Martinuzzi at Lake Street Capital.

[Eric Martinuzzi:]

Hey guys. I was curious to know the negative services gross margin in Q4, what's the explanation for that?

[Rob Noreck:]

That's related to some of the timing of expenses for project delivery. We don't expect that negative margin to continue going forward.

[Eric Martinuzzi:]

Okay. And then as far as gross margins for 2024, do we expect anything substantially different than the year just ended?

[Rob Noreck:]

No, I think they'll be in line. I think the product and engineering team has taken great strides to control the cost there. You'll see a portion of those costs increasing year-over-year related to depreciation and amortization. So, where we can control the costs we are. But overall, I think the gross margin will stay roughly in line with where we are.

[Marc DeBevoise:]

And Rob, I think worth commenting on the D&A sort of peaking at a certain point.

[Rob Noreck:]

Yes. And as we go into 2024, the depreciation and amortization from our historical capital investments will peak in 2024 and then start to run off as we finish capitalizing those projects as we get into 2025, 2026.

[Eric Martinuzzi:]

Got you. The operating expenses, you mentioned a 5% reduction in the head count in Q1, but that it took place, I guess, kind of midstream. So, given that we had $29.4 million of OpEx in Q4, what's the right way to think about Q1 and then 2024?

[Rob Noreck:]

Yes, I think Q1 will be roughly in line with what we saw in the fourth quarter, just a little bit under. And then as you go into the second quarter, they will step up a little bit, as I mentioned, mainly due to the timing of merit. We have slid merit increases out to the second quarter. So, see the timing of that increase hit in the second quarter and operating expenses will tick-up a little bit there.

[Eric Martinuzzi:]

Okay. And then, Marc, you made some substantial management changes, including the guys sitting next to you. Also our Chief Marketing Officer, Chief Revenue Officer, you've now got a Chief Operating Officer. What -- do we -- are we pursuing the same strategy with just kind of new players in place or are there potential shifts in strategy with the addition of these senior execs?

[Marc DeBevoise:]

No, I think on the CRO and CMO front, we have two tremendous new people in who are jumping in both head end feed first. I'm excited about them joining. We picked the right people for the right spots for those two roles. We went without a CMO for over six months last year and obviously, the CRO, which I took that internal for about a quarter and a half. So, it's great to have them on board, and I'm excited for what you're going to see come out of those two. David Beck, who's been here for almost as long as I have, it was really a promotion to COO and taking on some new responsibility centralizing effectively our data and revenue and marketing operations functions as well as the strategy function together to be a sort of a central source of truth for the company. I think that's a really strong model for us on how to operate going forward and really be data-driven. And then Rob, obviously, we talked about it a little bit, been here a long time, making a decision that this is the right moment to transition. We've done a really good job of working together to figure out how that was going to kind of play out over the course of this year. And I think we have a great plan in place. We're obviously searching for a new at this moment, but are already into that process. I feel really good about how we're going to make that transition here likely in the second quarter.

[Eric Martinuzzi:]

Understand. Good luck on 2024.

[Rob Noreck:]

Thanks, Eric. Marc?

[Marc DeBevoise:]

Great. Well, with that, thank you, guys, for joining and thanks everyone for joining us today. I'm going to close with a few thoughts about what I think are the opportunities for investors in breakup stock. We believe our mostly overage decline driven revenue results in 2023 have been, frankly, disproportionately reflected in our stock price. We're currently trading at well below one times enterprise value to forward revenue, below one times enterprise value to forward gross margin, and below 6x enterprise value to forward adjusted EBITDA, and this is for a business with a secure, highly recurring revenue base of nearly $200 million, a projected adjusted EBITDA growth of 25% in 2024 and a projected free cash flow improvement year-over-year of over $15 million. So, we believe we've built an operating plan that is resilient even if top line growth is a little bit elusive, and we are committed to protecting profitability in any conceivable scenario. So, we recognize that it's important we demonstrate that our strategic plan can deliver top line growth and that we believe we can generate cash while doing just that. At current levels, we believe the stock provides a compelling opportunity for investors at the value in a highly asymmetric risk reward opportunity and a sizable shareholders ourselves, our management team is dedicated to delivering consistent execution that will enable our valuation to better reflect what I believe is the fundamental value of this business. So, with that, I thank you all for joining the call today, and we look forward to seeing you on the next quarter's call.