BrightView Holdings, Inc.
Q4 2015 Earnings Call Transcript

Published: 2 Mar 2016

[Operator:]

Greetings and welcome to the Bazaarvoice Third Fiscal Quarter 2016 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Ms. Linda Wells, Director of Investor Relations for Bazaarvoice. Thank you, Ms. Wells. You may now begin.

[Linda Wells:]

Good afternoon and welcome to today’s conference call to discuss Bazaarvoice financial results for the third quarter of fiscal 2016 ending January 31, 2016. I am joined today by Gene Austin, Chief Executive Officer and Jim Offerdahl, Chief Financial Officer. Following the prepared remarks, we will have a question-and-answer session. Please note that we are simultaneously webcasting this call on our Investor Relations website at investors.bazaarvoice.com. The earnings release with our results for the third quarter of fiscal 2016 was issued after the market closed today. Certain statements made during this call, including those concerning our business outlook and guidance, growth plans and opportunities, potential acquisitions, outlook on legal matters, sales executions and the ability to capitalize on our opportunities are all forward-looking statements. Forward-looking statements are subject to a number of risks, uncertainties and assumptions that are described in our SEC filings, including the Risk Factors section of our Form 10-K for the fiscal year ended April 30, 2015 filed with the SEC on June 25, 2015. Additional information will also be set forth in our future quarterly reports on Form 10-Q, annual reports on Form 10-K and other filings that we may make with the SEC. Should any of the risks or uncertainties materialize or should any of our assumptions prove to be inaccurate, actual results could differ materially and adversely from those anticipated or implied in these forward-looking statements. We do not intend and undertake no duty to release publicly any update or revisions to any forward-looking statements made during this call. The divestiture of PowerReviews was completed on July 2, 2014. As a result of this, PowerReviews revenues, related expenses and loss on disposal net of tax are components of loss from discontinued operations in the condensed consolidated statements of operations since our fourth quarter of fiscal 2014 and all comparative fiscal quarters presented. The statement of cash flows is reported on a combined basis without separately presenting cash flows from discontinued operations for all periods presented. Some of the numbers that we will discuss today during this call will be presented on a non-GAAP basis. Today’s press release, together with the accompanying tables, contains the calculations of these non-GAAP financial measures and a full reconciliation between the corresponding measure, the GAAP measure and the non-GAAP measure, including the reconciliation of GAAP to non-GAAP operating results from continuing and discontinued operations. I would now like to turn the call over to Gene.

[Gene Austin:]

Thank you, Linda and thanks to all of you joining us today. While Bazaarvoice is transforming as a company, I am generally pleased with the results we delivered in the third quarter. Revenues of $50.3 million were above the midpoint of our guidance despite disappointing advertising results and we delivered our second consecutive quarter of adjusted EBITDA profitability and positive operating cash flow. For the quarter, EBITDA was $3.1 million significantly better than guidance and we generated $8 million in operating cash flow. Our EBITDA and cash flow gains are the result of strong improvements in our overall business operations and quote to cash processes and we expect to drive further profitability gains in the coming fiscal year. However, as we have said on past calls, returning Bazaarvoice to healthy revenue growth remains our top priority and let me update you on that front. Our strategy for growth is comprised with three key objectives

[Jim Offerdahl:]

Thank you, Gene and thank you to everyone who joined the call today. Today, we are reporting results for our third quarter of fiscal 2016 ending January 31, 2016. For the third quarter, we achieved total revenue of $50.3 million, up 1% year-over-year and within our guidance range. We achieved SaaS revenue of $47.9 million, up 3% year-over-year. Advertising revenue for the quarter was a very disappointing $2.4 million, down 24% year-over-year. We achieved positive adjusted EBITDA for the second quarter in a row and a $3.1 million. It was a significant improvement from $2 million in the third quarter last year. As we drive towards expected positive adjusted EBITDA for the full fiscal year 2016, we have been gaining operating leverage by tightly managing our headcount across all functions. We achieved positive cash flow from operations in Q3 of $8 million, positive for the second quarter in a row, again fueled by improved quote to cash processes and by near record collections. Our non-GAAP EPS for the third quarter was a positive $0.02, our first positive EPS since going public in 2012. We launched 87 clients in the third quarter, which was similar to last year and down from the 103 in Q2 as is typical as many of our clients delay launches during this holiday shopping season. We lost 64 clients in Q3, which translates to a client retention rate of 95.3%. Note that more than half of these client losses were small clients, which represent less than 10% of our dollar churn in Q3. We ended the quarter with 1,383 active clients, up 7% from a year ago. Annualized SaaS revenue per average active client in the third quarter was $140,000, similar to the $140,000 to $141,000 over the prior three quarters. Moving to our P&L. Gross margins for the third quarter were 64.4% compared to 65.4% in Q3 of last year as we continued to incur higher amortization of capitalized software from our innovation investments. Our overall gross margins have improved each in the last two quarters and we continue to believe our gross margins for the full fiscal year will be in the low to mid-60s. Sales and marketing expenses for the third quarter were $15.2 million or 30.3% of revenue, as compared to $16.9 million or 34.2% in the same period last year. For the full fiscal year, we expect our sales and marketing expenses to be in the low-30s as a percent of revenue. R&D expenses for the third quarter were $9.1 million, representing 18% of revenue as compared to $7.9 million or 16% in the same period last year. We expect to grow our dollar investment in R&D for fiscal year 2016 as we continue to innovate and invest in new products and solutions, including shopper advertising to drive growth. G&A expenses for the third quarter were $5 million or 10% of revenue, as compared to $5.6 million or an 11.3% in the same period last year. We continue to gain leverage in G&A this fiscal year, including better bad debt expense performance. Annualized revenue per employee was $240,000 in the third quarter. We ended the quarter with 817 employees, down from Q2 as we tightly manage our headcount across all functions. Moving on to the balance sheet and cash flow, DSOs were 72 days, a significant improvement from 103 days in Q3 of last year and up only several days from Q2 despite the typical higher mix of annual billings in Q3 as we had near record collections in the quarter and as we further improved our receivables aging. We believe this performance is a function of improved customer satisfaction as well as improved quote to cash processes. Our deferred revenue balance was $63.2 million at the end of Q3, compared to $63.5 million at the end of Q3 last year and $59.1 million at the end of Q2. Higher annual billings in Q3, as is typical versus Q2 contributed to the sequential increase. As I noted earlier, we achieved cash flow from operations in Q3 of $8 million, significantly positive for the second quarter in a row. Note that year-to-date, our operating cash flow has greatly improved from last year-to-date, from a negative $19 million last year to positive $15.3 million this year, a year-over-year improvement of more than $34 million. This improvement is a result of significantly improving our profitability as measured by adjusted EBITDA as well as a strong working capital management, especially receivables. CapEx was $9.3 million in Q3, which included $6.7 million for a new Austin facility that we moved into in December and $2.6 million of capitalization of developed software as we continue innovation on our new products and solutions. As a result of free cash flow in Q3, was a negative $1.3 million. Our balance sheet remains strong with $109 million in cash, cash equivalents and short-term investments as of January 31, 2016. Given our strong year-to-date cash flow performance, we chose recently to pay down $10 million on the credit line, such that there is now $47 million in debt outstanding. Now I would like to finish with our financial outlook. With respect to advertising, given disappointing performance so far this year related to our legacy business, we now expect our advertising revenue to be flat for our full fiscal year 2016. As Gene noted, we have started to build pipeline and execute shopper advertising campaigns and expect shopper advertising will be an important part of our fiscal year ‘17 revenue plan. For the fourth quarter, we expect total revenue to be in the range of $47.9 million to $49.9 million. Summing that up for the full year, we are narrowing our total revenue range to $197 million to $199 million, an increase of 4% at the midpoint of the range. In addition, as Gene noted, we are taking a number of actions to focus our investments on the best opportunities for growth while streamlining our business. As a result, we are reducing our overall headcount by approximately 50 people and expect to incur one-time expenses of approximately $900,000 in severance and other costs in Q4 associated with these actions. These costs are excluded from our Q4 and full year adjusted EBITDA and non-GAAP EPS guidance. For the fourth quarter, we expect adjusted EBITDA to be in the range of negative $0.4 million to positive $0.6 million. For the full year, we expect adjusted EBITDA to be in the range of $0.5 million to $1.5 million, a year-over-year improvement of almost $10 million at the midpoint. For the fourth quarter, non-GAAP net loss per share is expected to be in the range of $0.03 to $0.05 based on 81.6 million weighted average shares outstanding. For the full fiscal 2016, non-GAAP net loss per share is expected to be in the range of $0.08 to $0.10 based on 80.9 million weighted average shares outstanding. We are currently going through our annual plan process and we will provide specific revenue and adjusted EBITDA guidance for fiscal 2017 on our Q4 earnings call in June. That being said, we expect to continue to make good progress on profitability as we implement the efficiency actions while continuing our investments for growth. I would like to remind everyone that we will be presenting at the Morgan Stanley Conference in San Francisco tomorrow. With that, operator, please turn the call over for questions.

[Operator:]

Thank you. [Operator Instructions] Our first question is from Jeff Houston of Northland Securities. Please go ahead.

[Jeff Houston:]

Hey, guys. Thanks for taking my questions. Looking at the three large deals that closed in the quarter, what products were those for?

[Gene Austin:]

All those products and all those deals represented were our core conversations platforms plus our new offerings. And I think each of them also included a nice chunk of services as well, so pretty much right down the middle of our SaaS product line.

[Jeff Houston:]

Got it. Great. Then looking at your sales people, how are you compensating them, like for example, how are you encouraging them to sell more than just the conversation solution and really encouraging to sell the whole suite, especially with Spotlights coming on?

[Gene Austin:]

Well, I think there is some incentives for bundling of our products, but to be honest with you, the real incentive is the fact that the products have a lot of appeal, right? They broaden the footprint of our presence in any of our accounts and I think they offer just solutions that our clients are looking for. No real significant special incentives. It’s just the fact that I think we have built some compelling offerings around, especially in the area of curations, sampling and obviously Spotlights.

[Jeff Houston:]

Okay. Then I guess switching to guidance, how much – what type of growth are you assuming for advertising for the rest of the year? And what gives you comfort that it is conservative enough given the headwinds you experienced this quarter?

[Jim Offerdahl:]

Yes, Jeff, this is Jim. I mean, we have guided full year to be flat for advertising, flat with last year. We have come off a couple of tough quarters. So, we just based our guidance there on what we believe is in the pipeline and the new people we have, new CRO and the new people we have in the advertising business.

[Gene Austin:]

And Jeff, we have spent the last 6 months really digging into kind of our legacy business with the goal of really just stabilizing it. We are really turning all of our investment on the shopper advertising initiative, but stabilizing the core business. I think we are underneath that and I think we feel a lot better about how Q4 is trending moving forward.

[Jeff Houston:]

Got it. Thank you.

[Operator:]

Thank you. The next question is from Kevin Liu of B. Riley. Please go ahead.

[Kevin Liu:]

Hi, good afternoon. I guess, first off, starting on the advertising piece, can you just give your commentary in terms of how much of the growth issues over the course of this year have been worked kind of company-specific versus what might be attributable to just a broader industry slowdown? And then beyond that, as you look towards the shopper media starting to rollout and contribute to your growth, should we think about it as a handful of large campaigns can really move the needle from a growth perspective or is this one where you are going to really need to add a lot of new clients in order to be successful here?

[Gene Austin:]

Yes. Kevin, I think it’s hard for me to give you specific quantities on the issues from how the issues breakdown between company and market. It’s clear that the legacy business is one that we inherited, which is monetizing retailers’ sites with advertising. There have been definitely some declines, impressions delivered out of some of the retail partners we have which obviously impacts our business. But I think the mobile – the move to mobile has been a big contributor as well. And frankly, we didn’t invest in this part of our advertising business around mobile. We have very much so in the shopper advertising arena. But that being said the change to mobile also caused us some challenges. So, I think, as we look forward, we are looking to a more conservative way to look at that side of the business. We still have some significant retailers that are our partners and we are doing some things to mitigate some of the challenges. But like I said, most of our investment going forward will be on the shopper side. On the shopper business itself, what we are seeing is $25,000, $50,000 very small campaigns with a lot of our brands are becoming $500,000, $1 million RFPs that we are in the midst of, right? And so we are giving you guys – trying to give you guys an impression that this business is definitely moving forward. It’s hard to quantify at this point, because it’s so early, but we are very encouraged. We are so encouraged that we have both SaaS and our advertising teams teaming together, making calls, building pipeline and feel like we are going to get some efficiencies out of our SaaS relationships with the brands that are going to help us break into some of these organizations faster. Shopper advertising is on its way. It’s going to be an interesting next couple of quarters to see how that business continues to evolve. Like I said in the prepared remarks, we really believe it’s an important part of the ‘17 revenue story.

[Kevin Liu:]

Got it. And you also mentioned earlier that Q3 was probably your strongest bookings quarter for the year and things look pretty favorable for Q4 from a bookings perspective. In that context, would you expect Q4 to be the highest overall dollar value of bookings in the quarter or would it have a normal seasonal tail off versus Q3 levels?

[Gene Austin:]

I mean, it has the opportunity to be the biggest. I am not here to call that, but it certainly has an opportunity to be the biggest. I think what I feel the best about in Q4 is that the bookings has the opportunity to get larger and churn is definitely our lowest – our forecast for the lowest in four, five quarters. Look, we have been battling high churn based on, first, the settlement and then just in general things that we have had to deal with from a client health standpoint. And what I – churn, I feel like as I look forward, I mean, it bumped up this quarter. We had a couple of things that we weren’t expecting. But as I look into Q4 and in the out quarters, I see the opportunity to have a different level of churn than this company has seen in the last four, five quarters. And certainly, next quarter, we will have even a better feel for that, but Q4 looks encouraging at this point. From a booking standpoint, we are still evolving our sales execution. Productivity has moved in a good direction at a deal level. Going against that is obviously ASPs have gone down a little bit. We are trying to – we are having some upward early success with solutions in bundles, but it’s a new normal for us in the sales standpoint. And what’s exciting as the sales teams are starting to embrace that and we are starting to see deal productivity that’s resulting in better bookings performance. But we have a new CRO. We are still getting our sales organization lined up for the best success. We are going to hire a few more salespeople, which is good both in U.S. and Europe. So we are starting to feel much better about the opportunity to deliver on the bookings line.

[Kevin Liu:]

Okay. And maybe just along the lines of dollar churn, can you give us a sense for where you guys have been for the past year in terms of the headwind you have been facing and what a more normalized number might look like?

[Gene Austin:]

Well, I think the way to look at that is we have often talked about our client churn rate being 3% to 4% a quarter, right. And we have said that dollar churn has been higher than that. I think all but one quarter since I have been CEO. And the opportunity is if we are successful that’s going to flip. And I can see the possibility of that happening, I am certainly not forecasting it yet, but we can see that flipping and that would start getting us into the area of acceptability.

[Kevin Liu:]

Alright, great. Thank you for taking the questions and good luck.

[Operator:]

Thank you. The next question is from Scott Berg from Needham & Company. Please go ahead.

[Peter Levine:]

Hi. Thank you. This is Peter Levine in for Scott. Questions just around on the media business, if you could talk about why the miss, what’s driving this slowness in the media business and any of the market dynamics when you go to market, what’s kind of preventing the delayed purchase decision from some of these customers?

[Gene Austin:]

Yes. We are seeing as much delayed purchasing as we are, just our ability in our legacy business to deliver. The impressions that we were expecting out on our retail partners have not been as high as we thought, mostly in our programmatic side. Again, that’s driven by some of retail partners just had overall lower impressions in aggregate. And the rest of it was around the fact that we are primarily a desktop or in an advertising business and mobile impressions became a much bigger deal. Now as we look forward, we are making some changes to optimize that business. I mean not optimize it, but up stabilize it. And so we expect our legacy business to offer a reasonably steady run rate going into next year. We are not in the market to grow and drive additional revenue growing out on the retail networks that we talk about. We are in the business now using our shopper data in a very unique way to drive conversion oriented campaigns for brands as they want to get in front of particular sense of shoppers. Shopper advertising is very much based on our first party data that allows us to aggregate shoppers of alike attributes and allows brands to market specifically to them. And the early returns, as I have said before are really favorable.

[Jim Offerdahl:]

And that’s where we have turned our investments as well.

[Peter Levine:]

Great. Thanks. And the final question is just with Liz, the new CRO, I think she has been here for a quarter, can you just kind of bring in more color to kind of changes she had made in sales organization, go-to-market strategy, anything that you see in this quarter or at least in the Q4?

[Gene Austin:]

I mean, Liz has brought new energy and new thinking to the business. She has also brought a critical eye to how we are going to market from an advertising perspective. One of the first things she has done is she has merged the sales force together. So we don’t – we used to have the separate advertising and SaaS teams, they are now working accounts together, common account plans. Both sides are able to tell the BV story in a much greater level than we were, say six months ago. So and we are now in the process of bringing in new leadership in the sales arena, most notably in the advertising side to partner with the SaaS team. And we are making some changes as well to our go-to-market approach. So there is a lot of things going on, we will have a more clear picture of how we go to market and how we are changing that in our next call, but she is off to a good start.

[Peter Levine:]

Great. Thank you very much.

[Operator:]

Thank you. The next question is from Stephen Ju of Credit Suisse. Please go ahead.

[Unidentified Analyst:]

Hi, guys. It’s Chris on for Stephen. Two quick questions from us, so you said your new products are about 25% of bookings now and that was about 32% penetration in the United States and 17% in Europe, is there anything structurally different in the way your sales force has to approach these businesses and do you think sort of that divide you have to go back to the drawing board on the new strategy to sell them internationally or is it just sort of the rate of adoption in each one. And then when you said you are refining the go-to-market strategy with the small and medium businesses, because of the retention rate, just wondering if you guys can give us an approximate idea of how many of your existing customers would sort of fall in that bucket?

[Gene Austin:]

Yes. I think first of all, on the Europe, U.S. I think Europe has been slower on the new products mostly because of some internal challenges we have had and just getting information and training and getting them up to speed on the new products. I don’t think it’s anything around their market. That’s really on us. We need to do a better job. That being said, the ratings on the review business in Europe is much – there is even more opportunity for that business in Europe than in the U.S. So their pipelines are still quite good, but they have – they continue to find success in just selling our core offerings. But we believe there is no reason why Europe can’t be at the same rate as the U.S. our new product sales grew. And then your second question, the SMB. It’s hard to quantify that – and what I would say is that organizations roughly speaking of $100 million in revenue unless it’s just not a good fit for our conversations ratings and review platform. It’s – that platform is more complexity than those low end brands want, they want something simpler and more price effective. That being said, I don’t think that – I mean that illuminates probably several logos from our overall sales each quarter. But the deal – the ASPs are going to go up overall because we are going to be selling and concentrating on more than mid-market and enterprise. We think it’s just – this is a classic example of taking a look at where you are selling, where you are making money, where you are not and deciding that what we are doing from a product standpoint in the small business arena doesn’t make sense right now. We are looking at it because a lot of our retailers want some of these small brands and we are taking a hard look at it from an investment standpoint. I don’t have anything to discuss today. But if we go out, we are going to go out in a very different way than we are currently going at it right now. I want to focus our core direct sales force on TAM that is available to us both in Europe and the U.S. in our mid and enterprise markets where we have done a lot of analysis and feel like there is plenty of headroom for us to go forward. And we also think it’s so synergistic with our advertising play that will help the advertising play having more resources focused on market.

[Unidentified Analyst:]

Thanks guys.

[Operator:]

Thank you. [Operator Instructions] The next question is from Ilya Grozovsky of National Securities. Please go ahead.

[Ilya Grozovsky:]

Thanks guys. Just had a couple of questions on the headcount reductions, is that all going to be in the fourth quarter, has some of that already happened, kind of if you could talk about the timing?

[Jim Offerdahl:]

Yes. Ilya this is Jim. Most of it will happen in the fourth quarter. There are some in – that might occur in the first quarter or so as we transition say some engineers, etcetera. So, most of it in the fourth quarter and most of the impact financial impact, in the fourth quarter as well.

[Ilya Grozovsky:]

Okay. And then from an adjusted EBITDA perspective, in the fourth quarter just to be clear, you said the adjusted EBITDA was going to be what you are estimating?

[Jim Offerdahl:]

Yes, for the full year is $0.5 million to $1.5 million and in Q4 the EBITDA was negative $0.4 million to $0.6 million guide or $0.1 million midpoint.

[Ilya Grozovsky:]

And does that include the costs of the severance and things like that or you are ex-ing that up?

[Jim Offerdahl:]

We ex-ing it out, it excludes severance and related costs of about $900,000, to the extent that those people impacted are still here, the ongoing salary until the severance is included, but the severance is excluded from EBITDA.

[Ilya Grozovsky:]

Okay, got it. Great, thank you.

[Operator:]

Thank you. The next question is from Brendan Barnicle of Pacific Crest Securities. Please go ahead.

[Trevor Upton:]

Hi, this is Trevor Upton on for Brendan. Thanks for taking my questions. This was the second quarter in a row of very strong accounts receivables collections and strong, just wondering if you can give more color on what’s driving that and kind of how much far that can improve?

[Gene Austin:]

Yes, there is a limit to it, but we had very significant progress generating $15 million year-to-date operating cash flow both from EBITDA performance as well as working capital performance, specifically receivables. Our aging has improved. There might be some more to go, but we have made the bulk of the progress on our receivables. And so that’s had a couple of impacts, obviously the cash flow impacts, it had DSO impacts and it had bad debt expense impacts, positive impacts as well. I think it is the result of better CSAT from our customers as well as we have been working hard internally on internal systems and processes around quote to cash.

[Trevor Upton:]

Okay, great. And maybe go back to Peter’s question, I think this was the second quarter in a row also of disappointing advertising sales with a strong pipeline. Is there anything that’s keeping those deals in the pipeline and not bringing them into the quarter?

[Gene Austin:]

Yes, it’s really not – it’s two separate businesses. Again, where we are seeing most of our disappointment is from the business that we acquired a couple of years ago, right? And the shopper advertising business, which is our new business, is ramping. So, we weren’t expecting big results out of shopper advertising in Q3. We were expecting kind of what we received, which was kind of the slow start ramping and we now are starting to build pipeline in earnest as we test it all out and get confident in the results we are seeing. The legacy business again, so does that make sense? You have got – you understand?

[Trevor Upton:]

Yes, that makes sense. Thank you. And then last question with the headcount reductions, can you give any color on kind of where that’s coming from either geographies or kind of business areas?

[Jim Offerdahl:]

Yes, this is Jim. It covers pretty much all our geographies. It is in all our functions as well, some functions more than others. I would say that the R&D/engineering function and our services function were impacted the most. And we just believe that, that’s the right thing to do from an efficiency perspective. And that’s also a function that we have chosen to suspend sales of BV Local, which has freed up some of those engineers.

[Gene Austin:]

Most of the engineering cuts are because we are ramping down the R&D investment in BV Local. And most of the services reductions are due to the fact that if we sell to less small businesses, we need a fewer people to support, deploy, etcetera, those organizations. And then the rest of it is mostly from just being smarter about how the organization is set up streamlining some things reducing span or increasing spans of control.

[Trevor Upton:]

Okay, that makes a lot of sense. That’s all for me. Thank you.

[Operator:]

Thank you. At this time, I would like to turn the conference back over to Mr. Austin for any closing comments.

[Gene Austin:]

Thank you all very much for attending today’s call. We look forward to presenting our Q4 results and our ‘17 plan in June. We will talk to you then.

[Operator:]

Thank you. Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time and thank you for your participation.