Qumu Corporation
Q3 2021 Earnings Call Transcript

Published: 30 Oct 2021

[Operator:]

Welcome to Qumu's Third Quarter 2021 Conference Call. My name is Kevin and I'll be your operator this afternoon. Joining us is Qumu's President and CEO, TJ Kennedy; COO, Rose Bentley; and Matt Glover from Gateway Investor Relations. At this time, all participants are in a listen-only mode. After the speakers presentation, there will be a question-and-answer session. I would now like to turn the call over to Matt Glover, Sir, you may begin.

[Matt Glover:]

Thanks, operator and good afternoon, everyone. After the market closed today, Qumu issued a press release announcing it's financial results for the third quarter ended September 30, 2021, a copy of which is available in the Investor Relations section of the company's website. During today's call, management will make certain statements with respect to the company's expected financial results, the company's go-to-market strategy and efforts designed to increase the company's traction and penetration with customers. These statements are forward-looking and involve a number of risks and uncertainties that could cause actual results to differ materially. Please note that these forward-looking statements reflect management's opinions only as of the date of this call and the company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Please refer to Qumu's SEC filings, specifically it's Form 10-K and financial results press release for a more detailed description of risk factors that may affect the company's results. During the call today, management will discuss adjusted EBITDA, a non-GAAP financial measure, in the company's press release and filings with the SEC, both of which are posted on the company's website. You will find additional disclosures regarding this non-GAAP measure, including a reconciliation of this measure to it's comparable GAAP measure. Non-GAAP financial measures are not intended to be considered indication from a substitute for or superior to GAAP results. The company encourages you to consider all measures when analyzing it's financial performance. I would like to remind everyone that this call is being recorded and will be made available for replay via link available in the Investor Relations section of Qumu's website. Now, I'd like to turn the call over to Qumu's President and CEO, TJ Kennedy. TJ?

[TJ Kennedy:]

Thank you, Matt and good afternoon to everyone participating in today's call. Our financial results for the third quarter reflect the continued execution of our strategic plan to grow our cloud business and scale our SaaS recurring revenue base. Today, we have a growing SaaS ARR business which totaled $13.1 million at quarter end, up 19% year-over-year. Operationally, our partner in direct sales motions are gaining traction, while our customer success efforts are deepening relationships and further driving growth in our subscription ARR and cloud conversions. The cost optimization measures we implemented in Q3 are also now taking effect as demonstrated by our 9% sequential decrease in operating expenses we recorded during the period. Put together, we are clearly on our way to creating an even more focused, nimble and efficient organization. When we started the journey in our strategic plan, in Q3 of 2020, we were in a very different place regarding our SaaS business than where we are today. In 2020, SaaS revenue as a percentage of recurring revenue that was SaaS was 41%. In Q3, SaaS revenue as a percentage of recurring revenue was 52% and we expect SaaS revenue to be above 50% of recurring revenue for the full year. Q2 2020, SaaS ARR was $9.7 million which we grew to $11 million in Q3 of 2020 and we have steadily grown our SaaS ARR to $13.1 million by the end of Q3 2021. Our focus is to successfully transform Qumu into a SaaS-first company that drives the future of work with enterprise video and continue to drive SaaS ARR growth. As we continue to execute on our strategic plan, we will be laser-focused on our customers driving more value in the cloud for them while growing our SaaS ARR. Now, before we dive further into our operational initiatives and outlook, let me provide more color on our financial performance for Q3. Subscription maintenance and support revenue was $5.1 million, an increase of 2% compared to $5 million in Q2 2021 and an increase of 1% compared to $5 million in Q3 of last year. Total revenue for the third quarter was $6.4 million, an increase of 10% compared to $5.9 million in Q2 of 2021 and a decrease of 3% compared to $6.6 million in Q3 of last year. Looking at our SaaS metrics, subscription ARR increased 19% in Q3 to $13.1 million from $11.0 million in Q3 last year. The 19% growth was primarily driven by cloud conversions and cloud expansion. At quarter end, our SaaS gross retention rate or GRR, was 94% compared to 91% at the end of Q3 last year. Our SaaS net retention rate, or NRR, was approximately 119%, consistent with the end of Q3 last year. And finally, our SaaS dollar value retention was 101% compared to 99% at the end of Q3 2020. Looking at our margins; Q3 2021 gross margin was 76%, an improvement compared to 74% in Q2 2021 and 75% in Q3 of last year. The gross margin increase was primarily due to a larger mix of higher-margin cloud subscription revenues. Looking at our costs; as I noted in my earlier remarks, the cost optimization measures we implemented during Q3 drove a 9% sequential decrease in our operating expenses. While we are always going to look for ways and areas to improve efficiencies across the organization, as of today we are not planning to implement further cost-cutting measures. Turning to our profitability metrics. Net loss for the quarter totaled negative $3.7 million or $0.21 loss per basic share and diluted share. This compares to a net loss of $4.3 million or $0.24 loss per basic share and $0.30 loss per diluted share for Q2 of 2021 and a net loss of $1.9 million or $0.14 loss per basic and diluted share in Q3 of 2021. The year-over-year increase in loss per diluted shares was expected, as we transition the company to the cloud and recurring revenue SaaS subscription business. Adjusted EBITDA loss, a non-GAAP measure was negative $3.5 million compared to a loss of $4.5 million in the prior quarter and a loss of $839,000 in Q3 of last year. We ended the quarter with $18.2 million in cash and no borrowings on our revolving credit facility. We believe we have sufficient cash and capital resources to execute on our strategic plan to a cloud-first and SaaS subscription business. Now, that I've covered the highlights and the financial results, I'll turn it over to our COO, Rose Bentley, to discuss the ongoing implementation of our strategic plan and the traction we have on key initiatives. Rose?

[Rose Bentley:]

Thank you, TJ. Good afternoon, everyone. It's great to be here with you today. Now that TJ has covered this SaaS transformation and financial details, let me provide an update on some of the key areas within our transformation and our growth strategy. As a reminder, our team has been focused on transforming Qumu into subscription business centered around our customers and our partners. I'll begin with an update on our growth strategy and how we are driving new logo generation and building pipeline. Last quarter, we increased our emphasis on inbound marketing and our initiatives are gaining traction. We are creating better brand awareness already evidenced by the significant uptick in website traffic as well as engagement across social media channels and organic search performance. It's because of these concerted efforts, we are driving more lead flow which is generating pipeline to support our growth and our transformation. Our entire focus for sales, marketing and customer success is to ensure that our customers are at the center of all of our decision-making and that by listening to our customers' choice, we will continue to deliver innovation and a differentiated customer experience. Our continued marketing and sales efforts are showing signs of traction and giving us the opportunity to also focus on inspiring our partners to choose prefer and advocate for Qumu. Another key focus for our transformation is meeting our customers' where they are in their cloud journey. This focus will help us support our customers and drive us towards long-term reliability and maintainability. Overtime, supporting our customers on their cloud journey will help us grow our SaaS business. We have had great success migrating customers to the cloud which has grown our SaaS ARR. Some of the most successful initiatives include providing highly experienced professional services to ease the process. Along that line, we expect to grow our professional services as we help more and more customers embrace digital transformation in new remote and hybrid work environment. Delivering value to professional services to our customers is a useful tool to get deeper with customers and ensure they are maximizing the full capabilities of our platform. As we've noted previously, One of the most important initiatives we're executing on is on extending Qumu's footprint and value to customers through strategic partnerships and alliances. We have put focus on building out partnerships and scaling Qumu's channel to ensure we deliver innovation and a differentiated experience for our customers. Our largest customer win in Q3 was through our partner, GovSmart, a provider of IT products and services to the federal government and it's prime contractors. Partner-led customer wins demonstrate the effectiveness of our partner-first strategy and it's ability to augment our direct sales efforts. Importantly, the partner-led sales process is much more frictionless and accelerated because of our partners because our partners know their customers' needs and already have a contractual relationship in place. It's because of this dynamic that we have placed even more emphasis on expanding our channel-led sales force to scale our customer footprint and create a new and larger revenue opportunities for Qumu more rapidly. To ensure we attract innovative partners and enable our partner strategy, in Q3, we launched our new channel program which includes partner incentives, customer benefits, operational support and market development funds to help us further penetrate further the medium and large enterprise markets. Our differentiated partner program to help us secure our recently announced partnership with TD Synnex, a leading distributor and solutions for the IT ecosystem to bring Qumu's platform to their reseller distribution ecosystem. This is an exciting partnership for us, as more than 150,000 resellers within TD Synnex ecosystem now have access to enterprise-grade filling a critical market need as organizations look to adopt video technology to collaborate with employees, customers and partners in more engaging ways. TD Synnex offers the scale, purchasing efficiencies to attract large-scale OEMs and accelerate technology adoption of Qumu solutions, especially among enterprise customers. TD Synnex is the perfect addition to our enhanced channel program, thanks to it's deep roots in the reseller market and expertise in helping organizations accelerate the adoption in enterprise technology solutions that meet their critical business needs and fit within the rapid evolving IT ecosystem. Beyond the critical role partnerships are playing, our customer success team remains an equally important component of our strategic plan. This team has been making their mission to deliver ongoing value along the customer journey, yielding increased product usage, higher NPS and on-time renewals. In fact, in Q3, we had our best on-time renewal organization which surpassed our previous record achieved just in the prior quarter. Our customer success initiatives improved our ability to deliver additional value for our existing customers which has led to increased retention of our SaaS customers and will drive the SaaS subscription engine we're building. Our customer success team is not only focused on delivering on-time renewals, meeting our customers' where they are in their cloud journey and creating value along the customer journey but they are consistently looking for new approaches to engage customers earlier and more often in innovative ways. A good example of this is what we did for one of our customers, a large insurance company which worked with our customer success team to successfully migrate to the cloud. Now that they have migrated to the cloud and seeing improved performance, they will continue to leverage us for CEO town halls, plus they will be moving us to their de facto asyncibrae for use across multiple brands. Vodafone is another example who has a Qumu customer -- who has been a Qumu customer for seven years and successfully transitioned to our cloud solution in the wake of a pandemic. Vodafone uses our solution to bridge the gap of communication across their 100,000 employees with both synchronous and asynchronous video to both internal and external audiences from one platform. As you can see, our commitment to providing ongoing value to our customers will ensure we have the foundation we need to build upon and will in turn give us the ability to maintain focus on our direct sales and marketing efforts, while allowing us to be more strategic with our partner-led initiatives. And with that, I'll turn it back over to you, TJ.

[TJ Kennedy:]

Thank you, Rose. It's become abundantly clear that video is mission-critical for enterprise communications and the new standard is work from wherever, whenever. We believe we're still in the early days of a revolutionary transition where video is the central hub of business communications, whether it be for synchronous or asynchronous events. We've seen the innovators and early adopters recognize the power of video, brands like CVS, AT&T, Toyota and Vodafone, who Qumu is proud to call their customers. We've seen early adopters and large enterprises make the transition to cloud. Over the next three years, we believe the rest of the market will begin implementing enterprise video grade solutions at scale. It's because of this massive opportunity and innovation in the market that we're seeing consolidation in the space, including Microsoft's recent purchase of Peer5. Today, the world's most trusted and well-known brands rely on Qumu to deliver seamless video experiences that manage, secure and measure their content. We have the right plan and sufficient resources to execute on our plan. We have the dedicated leadership team with the right experience who are successfully executing the plan to build a world-class SaaS business. The execution of our strategic plan and cloud-first focus has enabled us to deliver strong SaaS growth and establish strong momentum for the balance of 2021 and into next year. As Rose highlighted, our partner and direct go-to-market motions, targeting both large and medium enterprises are gaining traction. Our customer success efforts are deepening customer relationships and driving growth in our subscription ARR and on-prem to cloud conversions. As we continue to transform our business, we remain focused on delivering robust SaaS revenue growth. We are scaling our SaaS business through our direct sales team, our customer success and account management organization and our enhanced channel and partnership ecosystem. Together, these elements will enable us to accelerate the value we can deliver to our customers. We believe SaaS businesses are built on strong foundations of process, people and technology and I can confidently say we have the foundation for our long-term success. Looking ahead, we remain on track to achieve continued SaaS ARR growth in our SaaS revenue mix goals. This includes growing our SaaS recurring revenue as a percentage of our recurring revenue to 50% this year, 60% by the end of 2022 and 70% by the end of 2023. Longer term, we are confident that Qumu will emerge as a subscription-driven growth company operating at scale, benefiting from high-margin recurring revenues, sustainable and growing cash flow and adjusted EBITDA and net income profitability. We will now take your questions. Operator, please provide the appropriate instructions.

[Operator:]

Our first question comes from Steven Frankel with Colliers.

[Steven Frankel:]

Good afternoon. TJ, I wonder if you might give us some insight on this volume of cloud upgrades or migrations you had in the quarter. How much of that was driven by the installed base, maybe a backlog that customers have been looking at this for a while versus either new direct touches from you or channel partner leverage?

[TJ Kennedy:]

Great question, Steve. It's definitely a mix of those 3. The -- just like Rose talked about, one of our larger new logo wins was definitely driven through the partner ecosystem for a key portion of that new revenue. I would say, in general, our conversions going from on-prem to SaaS typically are in the works for a while as far as the discussions go. A lot of these large enterprises take a significant amount of time to decide on their key large enterprise initiatives. And our team sometimes works those from six months to two years. It just depends on where they are in that journey. I will say that, that journey does seem to be accelerating a bit in 2021 with more permanent work from wherever in hybrid work we are seeing more and we saw more here in Q3. As far as overall for us on that journey, one of the things that we've seen is before we had about 50% of our on-premise customers that had made a decision to either upgrade to the latest on-prem or go to our cloud solution and now we're at around 60%. So, it continues to grow as folks that are driving through either those upgrades or conversions and we saw that continue in Q3.

[Steven Frankel:]

Okay. And then, you had put out a self-set self-service option. Could you give us an update on what kind of traction you might be getting with that low-end offering?

[TJ Kennedy:]

Yes, that low-end offering did not drive as much traction as we had hoped. We're actually currently working reassessing the best way to leverage that low-end offering. And as we've grown our partnerships and alliances recently, such as the TV Synnex announcement, we're now working with some of those key channel partners to look at the best way to drive the lower-sized enterprises through that channel partnership to drive more capability than doing that directly ourselves.

[Steven Frankel:]

And would you say, in general, how much of the bookings this quarter came from the channel?

[TJ Kennedy:]

In general, most of the new bookings were influenced by the channel in this quarter. At the end of the day, almost a majority of them, I would say, were channel focused.

[Steven Frankel:]

And so does that have implications for sales force productivity, something that you've been struggling with in '21, kind of where do you think you are in that journey to ramping up the productivity of our salespeople?

[TJ Kennedy:]

Definitely, it has a positive impact in that some of our channel partners are into some of the key customers that we're focused on and we are both hitting direct and indirect into our most targeted large and medium enterprises. But what we are seeing is that when we can go in with a partner, we end up having the ability to add even more value to that customer, sometimes bring unique relationships with that customer already that can help us with better and faster contracting. So really key for us as we drive forward that we think that channel and partners are going to be leading but not the only way we go to market. We still have key direct activities that are happening with our direct sales force and they're an important part of our overall mix. But you would definitely see that the channel is influencing key efforts going forward in addition to direct.

[Steven Frankel:]

Okay. And then on the gross margin, you mentioned that there were a lot of cloud deals this quarter. So is that 90% gross margin that we saw in the Software and Appliance business, is that kind of a one-off and we shouldn't think about that as being sustainable?

[TJ Kennedy:]

Yes. I won't necessarily say it's going to be the norm going forward. I mean we continue to think that for us as we add more and more cloud conversions and new cloud customers, our gross margins being in the neighborhood of 76% is more where we would see the business being and that will still have some hardware or on-premise deals that come through; it's just not a large volume at this point.

[Steven Frankel:]

Okay, great. I'll jump back in the queue.

[TJ Kennedy:]

Thanks, Steve.

[Operator:]

Next question comes from Mike Latimore with Northland Capital Markets.

[Mike Latimore:]

Great. Thanks very much. I guess, TJ, the stat you just mentioned there, I think you said of your base have agreed to upgrade either to your latest on-premise software or cloud, is that what you said?

[TJ Kennedy:]

That's correct, Mike.

[Mike Latimore:]

Okay. And I guess, you also said that the sales cycle in the semis going to be 12 to 24 months. So I guess if the upgrade, is that -- should we think about that 60% coming through to revenue in the next 12 to 24 months?

[TJ Kennedy:]

Yes. I mean, one of the unique things on -- there's a difference between conversion and an upgrade. On the upgrade, it's something that can take place in a shorter period of a few months to upgrade. So it's not as much of a transition. But on a conversion if they still maintain an on-premise solution in that first year, we actually have to -- from a revenue reconsent perspective, recognize that perpetual license in that first year. So you won't actually see as much of that SaaS revenue flowing through this year as much as you will, 12 months from now. So exactly what you're hitting on and if it's a multiyear deal, that could two or three years where that drives. So you still see some of that coming through as perpetual license even in a conversion if they still maintain an on-premise platform which a lot of customers that they've been on it for many years, may maintain that for 6 months or 9 months or 12 months if they choose to do that.

[Mike Latimore:]

How much SaaS revenues embedded in that kind of 60% upgrade notion?

[TJ Kennedy:]

It all depends on the deal size and it also depends on what their maintenance was before for a particular on-premise solution. And so it's definitely looking at what the value is of the on-premise perpetual license solution, they still continue to utilize and then the remainder of that ends up being a SaaS revenue that's recognized in this contract period.

[Mike Latimore:]

Okay, got it. And then, the OpEx level in this quarter, is that roughly what we should kind of keep for next quarter? Or does it tick down a little bit?

[TJ Kennedy:]

Yes. I would think it would remain flat on the OpEx side. It's approximately where we expect to be going forward. I don't think you'll see big additional ticks downward but I think we definitely have been able to optimize our operational expenses and take that into account here in Q3. And I would expect us to be fairly flat going forward.

[Mike Latimore:]

Got it. And then on SYNNEX, that was an interesting win. I guess, what's the next step there? Do you have to help with educating the resellers or training people? Or what's the next step to kind of get that channel up and running?

[TJ Kennedy:]

You had it exactly right. Yes, go ahead, Rose.

[Rose Bentley:]

Yes. So Mike, yes, thanks for the question because you're right, we all know that these partnerships are great wins but it really comes down to the enablement and the education of the sellers to ensure success. And so yes, we are focused now on delivering a message and helping the TD SYNNEX sales teams understand the value proposition we bring to the ecosystem they have. It's about understanding who's retiring quota, right, with Qumu. So we can get to know the individuals and make sure that we are supporting them to execute. So it is now an enablement. It is about building pipeline and understanding what that joint solution to market looks like and all about enabling the sellers.

[Mike Latimore:]

And are you a sort of new technology to that channel? Or have they worked in enterprise video in the past?

[TJ Kennedy:]

This is one of the things when we looked at partnering with them and really starting to understand their ecosystem, they don't and haven't worked with the enterprise-grade video solution that we bring; so this is a very differentiated offering to them.

[Mike Latimore:]

Okay, great. Thank you.

[TJ Kennedy:]

Thanks, Mike.

[Operator:]

Our next question comes from Jeff Henry with Craig-Hallum.

[TJ Kennedy:]

Hey, Jeff.

[Unidentified Analyst:]

Hey guys, this is Aaron on for Jeff and a couple here. So first, can you speak a little bit just kind of update on where your current legacy on-premise customers are? And what you're seeing there as far as churn is concerned?

[TJ Kennedy:]

As far as on-premise churn, it definitely is something that we see more churn and on-premise than we do in SaaS. We get that if you look at our overall GRR for combining our entire business and the difference between that and our SaaS GRR. But it's something that we have expected from the very beginning that on-premise churn due to both just the market conditions of data centers and offices and where things were going to into the future and then you add in COVID and so many people going to a hybrid and remote work environment, that shift to the cloud is something that is across the board continuing to happen. And so from our perspective, we do expect the on-premise churn to continue to have some slight decline throughout. But at the same point, we are seeing very good retention when we look at our SaaS, NRR and GRR overall. So we will continue to see that on-premise turn to be higher than what we have seen traditionally from the -- our SaaS base.

[Unidentified Analyst:]

Perfect. And then, maybe just some more bounds. I know you've given a couple of points here but any way to quantify what pipeline is looking like maybe sequentially or year-over-year?

[TJ Kennedy:]

So for us, I will say that our marketing traction continues to build to help build that pipeline. We have built a lot of awareness in the last quarter with new key positioning, a new website, regular media and social contributions that are driving a lot more awareness around Qumu. This has created a lot more demand. We have key targeted accounts that are focused on our integrated marketing program. That program has really grown the lead flow here in Q3 over Q2 significantly and we have a lot of confidence in creating early-stage engagement with those target accounts. And so our focus now is on cultivating that engagement. As we've talked about before, large enterprises typically are 12- to 24-month buying cycles. And so cultivating that engagement and driving more appointments, more discussions we'll end up driving a lot more logos into the future to become new customers of Qumu. And so we are seeing that continue to grow not putting on any specifics on it today but I will say Q3 was significantly generating a lot more leads from our account-based marketing program than we saw in Q2 which we see is continuing to build that pipeline.

[Unidentified Analyst:]

Got you, that's helpful. And then, just a couple more here. As far as revenue breakouts are concerned, I know you give the service line but is any way to quantify the subscription base there and how that's trending overtime?

[TJ Kennedy:]

Yes. I mean if we look at the $5.1 million overall of recurring and we look at 52% of that being SaaS, that can give you a feel for what that SaaS element is. And if we look back in the previous quarters, you can do the reverse math on that. But we were about 49% in Q2 and about 46% in Q1. So that can show you the continued growth of SaaS recurring revenue that's part of that.

[Unidentified Analyst:]

Got you. And then, last one for me. Any update on now that Dave's gone just the search for a new CFO?

[TJ Kennedy:]

Yes, the search for new CFO is going very well. We don't have an announcement to make today but we're progressing very well with that and very focused on getting the key talented resource to join the leadership team here with us and we feel very good about that search.

[Unidentified Analyst:]

Perfect, thanks. That's it for me, guys.

[TJ Kennedy:]

Thanks so much.

[Operator:]

Thank you. At this time, this concludes the company's question-and-answer session. If your question was not taken, please contact Qumu's IR team at [e-mail]. I would now like to turn the call back over to Mr. Kennedy for his closing remarks.

[TJ Kennedy:]

Thank you so much, Kevin. I appreciate it. Really just appreciate all the key questions today. This concludes our discussion and I want to thank everyone for joining today and look forward to speaking again soon. Thank you, all.

[Operator:]

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.