Qumu Corporation
Q2 2020 Earnings Call Transcript

Published: 29 Jul 2020

[Operator:]

Good afternoon, and welcome to the Qumu Second Quarter 2020 Conference Call. My name is Justin, and I'll be your operator for this call. Joining me for today's call is the company's Chairman, Neil Cox; President and CEO, T.J. Kennedy; and CFO, Dave Ristow. After the market closed today at Qumu, it's issued a press release announcing its financial results for the second quarter ended June 30, 2020, a copy of which is available on the Investor Relations section of the company's website at Qumu. During today's call, management will make certain statements with respect to the company's expected financial results, the impact of COVID-19 on the use and adoption of the video and the enterprise, 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 statements and involve a number of risks and uncertainties that could cause actual results to differ materially. Please note 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. Please refer to Qumu's SEC filing, specifically Form 10-K and 10-Q 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 and non-GAAP financial measures. 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 with its comparable GAAP measure. Non-GAAP financial measures are not intended to be considered in isolation form, a substitute for, or superior to GAAP results. The company encourages you to consider all measures when analyzing its performance. I would now like to remind everyone that this call is being recorded and will be made available for replay via a link available in the Investor Relations section of Qumu's website. Now I would like to turn the call over to the company's Chairman, Mr. Neil Cox. Sir, please proceed.

[Neil Cox:]

Thank you, operator, and good afternoon, everyone. It's a pleasure to have the opportunity to speak with you today. After the market closed, we issued our financial results for the second quarter ended June 30, 2020. As you can see from our earnings release, second quarter marked an exceptionally strong period for Qumu, both operationally and financially. The $9.3 million in quarterly revenue is the highest Qumu has achieved in several years and is the direct result of a swelling demand for our best-in-class software platform in a now largely remote work environment. On the general level, the COVID-19 pandemic has impacted the global economy collectively as well as all of us personally. The ongoing digital transformation initiatives at the enterprise level, which many projected would take years to fully materialize, have arrived nearly overnight. At Qumu, we are experiencing one way in which this expedited timeline has played out, which is through a fundamental shift in enterprise video usage, driving organizations across the globe to rapidly adopt and expand their use of video for both external business continuity and internal communications as the new normal. Qumu has played a pivotal role in helping enterprise sustain their business during COVID-19 as they have implemented mass work-at-home programs, virtualized events and execute large-scale internal and external broadcast using video. On top of this, we are also seeing an increase in self-service broadcasting where Qumu's platform provides a secured video delivery and management infrastructure to enable anyone within an organization to easily launch a live broadcast from either Zoom, Microsoft Teams, Webex or any other enterprise collaboration tool. To summarize, the Qumu platform has become a mission-critical infrastructure component that enables global enterprises to securely create, manage and deliver video at scale and for any use. Qumu's favorable competitive positioning within the enterprise video market and the accelerated shift within the industry are 2 of the main reasons why our Board of Directors determined it was prudent and the best interest of our shareholders to agree to terminate the proposed merger with Synacor at the end of June. And with our second quarter performance and recent operational changes, the Qumu Board remains confident it was the right decision for our supportive shareholders, our valued customers and especially our hard working employees. The exhaustive internal review we conducted as part of the merger process also allowed us to identify opportunities to strengthen the organization as a whole in an effort to more effectively maximize the growth opportunity in front of us. The most noteworthy of the operational changes we implemented recently is the appointment of T.J. Kennedy as our new President and Chief Executive Officer. T.J. succeeds Vern Hanzlik, who capably led Qumu as a CEO for nearly 5 years. On behalf of the Board and the leadership team, I would like to thank Vern for his service and invaluable contributions to Qumu. Vern was instrumental in transforming Qumu's software platform into what it is today, an award-winning, globally recognized end-to-end solutions for securely creating, managing and delivering live and on-demand video across any organization. We wish Vern all the best in his future pursuits. Today, Qumu is focused on accelerating sales growth and profitability. The pandemic has highlighted the immediate and far-reaching market need for our platform and in transitioning to a leader with T.J.'s deep sales and marketing experience, best positions Qumu to capture the opportunity in front of us. T.J. has previously been on the Board for a communications platform company in the telemedicine space, giving him a solid understanding of software-as-a-service and platform-as-a-service business models. He has also been involved in deploying video on an enterprise level for deployments going back into the early 2000s, during his time with SAIC, a Fortune 500 technology integrator. At SAIC as well as Raytheon, T.J. gained significant experience deploying large complex systems on-premise as well as hosted and cloud-based solutions. T.J. has also led initiatives in cybersecurity, large network implementations, large software development efforts and enterprise storage deployment. Clearly, he has the experience and the skill set to take Qumu to the next level. Although T.J. has only been on the Board for a very short time, he has already made marked contributions to our organizations. His significant experience in overseeing highly innovative projects, imaging complex deployments at scale, makes him the right leader at the right time for Qumu. From his extensive work within various critical technology markets, T.J. understands that perfect execution is absolutely essential. With the larger digital transformation continued in virtually every industry, we are confident T.J. will lead Qumu to even greater heights. We are looking forward to benefiting from his uniquely qualified skill set and capitalizing on our near and long-term pipeline of opportunities, which we believe will drive shareholder value over the long run. I would now like to turn the call over to T.J., so he can share with you why he's excited to join Qumu, some of his early observations and what he will be focused on over the upcoming quarters. T.J.?

[T. J. Kennedy:]

Thank you for the warm introduction, Neil. I really appreciate it. And thank you, everyone, for joining our call this afternoon. I'm really excited to be speaking with you today as Qumu's new President and CEO. Although I've only been onboard for a brief period of time, one thing that has already been absolutely clear to me is the passion, expertise and dedication of our team and what they have for both our organization and our customers. I have also been amazed by their ability to effectively adapt to today's dynamic working environment and to meet the increasing demands from a COVID-19 world. And as you can see by our strong financial performance in the second quarter, Qumu is at an inflection point, experienced unprecedented use and demand for our best-in-class solutions. The global pandemic has positioned Qumu as an even more essential part of our customers' businesses, fueling an exponential increase in the usage of our platform over the last several months. One illustrative example of this paradigm shift is the large expansion order we received at the end of first quarter from one of our financial institution customers that multiplied from 3,000 to 50,000 users in just a matter of days. This win, while notable in its own right, is indicative of an overall surge we're experiencing across our customer base, where usage is running at orders of magnitude above base levels, and which will ultimately translate to real revenue growth in the coming quarters. In fact, over the past 90 days, we've experienced greater than 100% growth in both the number of users and streaming bandwidth on our platform. Two notable examples of power users during the past quarter include a health insurance company that conducted executive broadcast to more than 20,000 live viewers and received 50,000 on-demand views for each event. And a computer manufacturing company that successfully ran multiple events with over 50,000 users participating from home and event producers working from their home studios. They used our self-service streaming and sophisticated management platform on a cloud hybrid platform to make this happen. As customers and prospects first solve their immediate video and collaboration needs in the wake of the pandemic with applications like Zoom, Microsoft Teams and Webex, we've seen a material increase in demand from both constituencies for Qumu's back-end video infrastructure platform to help them securely manage and scale their video needs that have outgrown these initial stop gap applications. As Neil highlighted, the pandemic has accelerated the market shift to video, compressing what we believe would have happened over the next few years into just a few months. Our sales pipeline activity tells us that customers are making strategic investments in video infrastructure. They are witnessing the savings and efficiencies of dramatically reduced business travel and a more connected workforce. We have seen a new hybrid work style emerge in which individuals can fluidly move between face-to-face and video communications from wherever they are and whatever device is most convenient. And when offices open up again, these individuals may go back to the office, but stepping backwards in terms of efficiency and quality of life will not be an option. Qumu's best-in-class technology has positioned the company perfectly for this booming video market. Even in just my first few days at the company, it's clear what sets us apart from the competition and why enterprises are selecting our platform. First, we make self-service video streaming easy, secure and infinitely scalable by integrating our enterprise-grade streaming platform with popular video conferencing applications. This is very important because it brings the power of Qumu streaming platform to everyone within an enterprise. Anyone who can conduct or take part in a small video conference meeting now has the skills and technology to launch a global webcast to thousands or even tens of thousands of viewers. Secondly, we help organizations realize the value for video content management with robust repositories, editing, captioning, analytics, archiving and more. The volume and value of video content is increasing exponentially. And therefore, so is the problem of managing and securing it all and Qumu solves that problem, which otherwise would quickly overwhelm customer capabilities and dramatically reduce the value to these customers of their video content. And last but not least, we've mastered intelligent delivery of live streaming video at scale across internal and external networks to any type of device and any location. This last one is a clincher because without large-scale streaming and intelligent delivery, video conferencing solutions are limited to small group meetings. We're stilling a major gap. As I'm sure you can hear in the tenor of my voice, I'm very excited about where the company is today and even more excited about the potential the company has to become a much larger organization. Along that line over the next 90 days, the leadership team and I will formulate a refreshed and optimize growth strategy for not only 2020 but for the years ahead as well. We'll be considering our product offerings, our geographic markets, our target customers as well as our overall go-to-market strategy. This process will aim to refine our future strategic roadmap and identify opportunities to accelerate our growth. This means we will have to change and adapt to take advantage of new opportunities. The Board and I are confident that we'll emerge from this process as a company and a path to becoming the leader in video technology for the enterprise, which in turn, will accelerate our growth and profitability. I'll now turn the call over to Dave to discuss some additional operational insights from Q2 as well and walk you through our financial performance for the period. Dave?

[David Ristow:]

Thanks, T.J., and good afternoon, everybody. Turning to our financial and select operational results for the quarter and 6 months ended June 30, 2020, revenue for the second quarter of 2020 increased 74% to $9.3 million from $5.4 million in Q2 of last year. For the first 6 months of 2020, revenue increased 25% to $15.6 million from $12.5 million for the comparable period last year. The increase in revenue for both the quarter and 6-month period was primarily due to a large customer order received at the end of Q1 2020, which the customer identified is specifically driven by COVID-19. A significant portion of that revenue was recognized in the second quarter 2020, with incremental revenue to be recognized in the third and fourth quarter of this year. During the quarter, we added 5 new customers and converted 2 enterprise customers to cloud hybrid. It's worth noting that the 2 cloud conversions were secured in the quarter and on 3-year contracts, representing an average 78% ARR uplift on their base renewals. For the first 6 months of 2020, we secured 17 new customer deployments with an average ARR of 66%. In comparison, we had 20 new customer deployments for all of 2019 with an average ARR of $49,000. So we're on pace to exceed prior year count with a higher average ARR from new customer deployments. Subscription maintenance and support revenue for Q2 2020 increased 12% to $4.7 million from $4.2 million in Q2 of last year, which was driven in part by revenue related to the large customer order I just mentioned. For the 6-month period, subscription and maintenance and support revenue decreased 9% to $8.8 million from $9.7 million for the comparable period in 2019. The decrease was due to the recognition of large multiyear term license renewals in the first quarter of 2019 that was not applicable in the comparable period in 2020. Looking at our margins. Gross margin for Q2 2020 was 68.5% and compared to 70.9% in Q2 of last year. The decrease was primarily due to a higher mix of appliance revenue, which generally carries lower margins compared to term license revenue. For the 6-month period, gross margins was 67.7% compared to 75.1% for the comparable period last year. The decrease was primarily due to a higher mix of appliance revenue and outsourced professional services expense for certain customer-specific projects in the first quarter of 2020, which also negatively impacted services gross margin then. Turning to our profitability metrics. For the second quarter 2020, net loss was $692,000 or a $0.05 loss per basic share and a $0.06 loss per diluted share. This is an improvement compared to the net loss of $3.6 million or $0.37 loss per basic and diluted share in Q2 of last year. Net loss for Q2 2020 included transaction-related expenses of $699,000 related to the merger termination with Synacor. For the 6-months period, net loss was $3.4 million or $0.25 loss per basic share and $0.27 loss per diluted share. This was an improvement compared to a net loss of $4.6 million or $0.47 loss per basic and diluted share for the 6 months ended June 30, 2019. Included in the net loss for the 6 months ended June 30, 2020, was $1.5 million in transaction-related expense for the merger termination with Synacor. Adjusted EBITDA, a non-GAAP metric for the second quarter of 2020 totaled a positive $809,000, an improvement from a loss of $1.4 million in Q2 of last year. For the 6-month period, adjusted EBITDA loss totaled $436,000. This was an improvement from a loss of $1.2 million for the comparable 2019 period. At quarter end, we had a healthy liquidity position with $9.9 million in cash and cash equivalents. On May 1, we had canceled the amended and restated warrant agreement with ESW Holdings to purchase 925,000 shares of our common stock. Concurrently, we signed a promissory note with ESW for up to $1.8 million, which equates to approximately $1.98 per share and reflects a deferred payment of the purchase price in respect to the prior warrant agreement. We believe this was a prudent move, especially given our current share price. Excluding the $1.8 million promissory note, Qumu is debt free. Switching gears to outlook. As we talked about on prior calls, we provide revenue guidance based on current market conditions and expectations, including the unknown financial impact that COVID-19 will have on economies and enterprises around the world. Based on our strong second quarter 2020 financial results as well as our expanded pipeline, we currently expect revenue for fiscal 2020 to be approximately $29 million compared to $25.4 million in 2019, representing a year-over-year growth of 14%. We will continue to assess our outlook for the second half of the year as more information becomes available on customer ordering trends and the economic disruptions caused by COVID-19. This concludes our prepared remarks. We will now open it up for questions. Operator, Justin, please provide the appropriate instructions.

[Operator:]

[Operator Instructions]. And our first question is going to come from Jeff Van Rhee from Craig-Hallum Capital.

[Rudy Kessinger:]

This is Rudy on for Jeff. I want to start with the large deal that was signed at the end of Q1. I just want to understand the terms of where the revenue is falling. How much total onetime revenue is there going to be from that deal this year? And how much fell in the quarter? How much will fall in Qs 3 and 4? And then I suppose that there's likely a recurring or subscription piece to it, how much is that recurring piece?

[David Ristow:]

Yes, certainly. Good question, and thanks, Rudy. Total onetime within the quarter was $3.9 million. It relates predominantly to the appliances that were delivered to go ahead and expand their delivery network. Recurring in the quarter was about $360,000. And then if you look forward to Q3 and Q4, you're going to see approximately $450,000 in each successive quarter thereafter.

[Rudy Kessinger:]

Got it. Helpful. And then I guess as you guys sort of trying to put a wraparound or -- I don't know if there's any way you can sort of quantify the uptick in demand. I know historically, you guys have talked about pipeline sort of in the 2.5 to 3x range. Can you share where that's at now? Any color on bookings in the quarter? Just any other metrics that could help sort of quantify the demand that you guys are seeing?

[Neil Cox:]

Certainly. T.J., when it comes to the pipeline, do you want to speak to coverage? Or would you like me to take that?

[T. J. Kennedy:]

Go ahead and just cover it for right now. That's fine.

[Neil Cox:]

Certainly. So Rudy, coverage today on -- over essentially bookings for the remainder of the year is about 4.2x, which is up from our historical kind of 2 to 3. I think what's of most significance here is that the strategy of the company has transitioned to a SaaS-focused business. The pipeline within essentially that 4.2x coverage is up 33% in our cloud and cloud hybrid pipeline. So what we're seeing is a lot more activity in essentially our cloud, cloud hybrid and SaaS-based revenue, which is 100% consistent with the strategy that we've been working towards.

[Rudy Kessinger:]

Got it. Great. And then, T.J., if you could, I know you said you guys are going to undergo a 90-day sort of reformulation of your growth strategy going forward. I guess, first of all, congrats and welcome to the team. But I guess, maybe as you see it, if you could just lay out the top couple priorities or I don't know if you call it low-hanging fruit, but just sort of lay out the opportunities that you see where we can really take it to the next level and capitalize on the opportunity in front of you that COVID's presented?

[T. J. Kennedy:]

Thank you. I'm happy to jump into that and really excited to be in the new role. Initially, as you noted, my focus right now is really on our team and our customers. I'm evaluating areas for growth and looking at ways to drive top line and bottom line improvements. Specifically, over the next 90 days, we're going to be building a strategic roadmap with the leadership team to really solidify our forward-looking vision. The most important thing that will come out of this process will be specific needs for talent and resources to drive that long-term growth. But I do believe we have some immediate opportunities. We're looking at what potential there is in the mid-market enterprise space as there's increasing demand based on what's happening with COVID-19 among these companies to support a distributed workforce and to find new ways to reach both customers and stakeholders and overcome the travel restrictions. I think that's really important, and that's where we're seeing a lot of the drive in this big change to work-from-home and how that's affecting not just the internal communications, but also those communications with customers. We will be looking at what kinds of things we could be doing more in healthcare and life sciences. We'll be taking a look at different spaces where there's other vertical growth for us to have in education. And so we're already taking that into strategic roadmap process and making sure that we focus on those areas that will provide the most value.

[Operator:]

[Operator Instructions]. I would now like to turn the call back to T.J. Kennedy, President and CEO, for closing remarks.

[T. J. Kennedy:]

Thank you so much. I appreciate that, Justin. In summary, Qumu completed its strongest quarter in first half since its transformation to a video solutions company. And given the current sales activity, we anticipate we will come through the current global crisis in a powerful position to take advantage of the tremendous growth in video. Interest in our platform is high by multiple measures. More specifically, our cloud and hybrid SaaS pipeline has grown by 33%. We have a significant revenue backlog, and our customer retention rates remain high at 90%. The recent change in world events prevents in-person meetings, and the work-from-home environment has created new technology-enabled opportunities that Qumu can leverage to take us to a new level. The environment is also dynamic and changing quickly. We will need to be responsive to these new opportunities to achieve success. I'm confident that our industry-leading platform and world-class team will be up to the task. Thank you for your time this afternoon, and I look forward to speaking with you again soon.

[Operator:]

And ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.