Qumu Corporation
Q1 2019 Earnings Call Transcript

Published: 4 May 2019

[Operator:]

Good day, ladies and gentlemen, and welcome to Qumu First Quarter 2019 Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. Instructions will follow at that time. [Operator Instructions] I will now turn the conference over to your host, Dave Ristow, CFO. You may begin, sir.

[Dave Ristow:]

Good morning, everyone, and thank you for joining our first quarter 2019 earnings conference call. We will make certain statements today with respect to our expected financial results, go-to-market strategy, and efforts designed to increase our traction and penetration with our 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 our opinions only as of the date of this call, and we undertake 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 our SEC filings, specifically our Form 10-K and our financial results press release for more a detailed description of risk factors that may affect our results. These documents are available at our website, qumu.com and at our SEC website – at the SEC’s website, sec.gov. During our call today, we will discuss adjusted EBITDA, financial measures and non-GAAP earnings per share. In our press release, and our filings with the SEC, each of these, which is posted on our website, you will find additional disclosures regarding these non-GAAP and adjusted EBITDA measures, including reconciliations of these measures with comparable GAAP measures. And with that, I will turn the call over to Vern Hanzlik, President and CEO of Qumu.

[Vern Hanzlik:]

Thank you, Dave, and welcome, everyone. First, I’d like to touch on some key financial highlights, and then I’ll review our progress against the strategic plan. I’m happy to report a strong start to 2019. Building on momentum from the second-half of 2018, revenue for the quarter was $7.1 million versus $4.8 million in Q1 of 2018, a 47% year-over-year increase. We also achieved another quarterly positive adjusted EBITDA, the third of our last four quarters. Gross margins were at a record high at 78.3%, thanks in part to a majority – opportunities generated by our channel partners involving large-term license renewals and limited harbor sales, and Qumu’s customer retention rate was very strong at 92%. Additionally, our annual recurring revenue base was comprised of 59.5% of on-premise support and maintenance and 40.5% of SaaS subscription at the end of Q1. Our cash position remains strong at $8.6 million to the end of the – at the end of the quarter. Our Q1 results give us a high degree of confidence going forward in 2019. With this in mind, we are confirming our annual guidance, which we will review after Q2 based on our pipeline strengths and mix of bookings. With marketing and sales steadily producing strong pipeline and opportunities, our channel program consistently contributing to both top and bottom lines, we’re well positioned for growth and expansion into new markets going forward. Speaking for the entire team, this is a very exciting time for Qumu. Our go-to-market strategy is working, and the successful transformation of our platform to the next generation of intelligent video platform is already helping companies create a video-aware networks. As you know, for the last two years, we’ve been predicting a collision of videoconferencing what Zoom and others do with the enterprise video, where Qumu excels. I’m happy to say that collision is happening right now and Qumu is benefiting directly as Global 2000 companies look to convert their existing videoconferencing platforms into large-scale self-service streaming platforms. A leading analyst firm are reporting on this collision as well. As some of you likely heard in January of 2019, Aragon Research named Qumu as a new contender in an annual research globe of web and videoconferencing. This is Qumu’s first inclusion in the ranking of web and videoconferencing companies, a market space traditionally dominated by firms Cisco, Microsoft, Google, Adobe and, of course, Zoom. Qumu was included in this report, because our platform is seamlessly adding large-scale streaming and comprehensive video management to all major videoconferencing platforms, therefore, extending both the reach and value of these systems. If you’d like to see a direct customer example of the convergence of videoconferencing and enterprise streaming and management, we just added a new case study and video on our website, which focuses on a long-term customer Vodafone. This telecommunications giant is using unified communications gateway, or UCG, to transform 4,000 Pexip virtual meeting rooms into full-featured broadcast rooms to make streaming and webcasting fully self-service for their global customer employee base. Along those lines, in Q1, Qumu released its new Zoom integration, which allows millions of current Zoom users to turn Zoom into self-service, live streaming and video management. With this new extension and our Pathfinder enterprise CDN, Zoom videoconferencing can now expand to several dozen attendees to full-blown live streaming events, reaching tens or even hundreds or even thousands of people with no negative impact on corporate network performance or bandwidth. To summarize, Qumu is in a great position for growth as a collision of videoconferencing and enterprise streaming and management continues to open up new markets for the Qumu platform. Now I’d like to report on the progress against our four pillars of our strategic plan. Our first pillar is sales execution and new customer growth. Our marketing team has dramatically expanded our digital footprint overall visibility producing steady – steadily flow of opportunities ensuring our sales pipeline remains strong at more than 3.5 times revenue coverage for 2019. We are building on a great success story we enjoyed with the industry analyst during 2018 when Qumu was named leader – industry leader by top research firms, including Gartner, Forst – Frost & Sullvian, Aragon Research and Wainhouse. And in Q1 of 2019, we were recognized as a leader, once again, by Gartner in the 2019 Critical Capabilities for Enterprise Video Content Management report. In that report, Qumu earned top three scores among 13 total vendors in three of the most important use cases facing corporate buyers of video technology today, internal executive messaging, internal training and internal collaboration. And in the State of the State 2019, Enterprise Steaming and Webcasting Report, Wainhouse Research ranked Qumu the industry leader in completeness of solution and among the highest in integration strategy. Giving our trusted role within the enterprise, the Qumu story will continue to attract attention from industry influencers as we ramp our growth in 2019. Qumu landed 7 significant new enterprise customers in Q1, consisting of five cloud hybrid customers and two enterprise on-prem customers. I’m very happy to report 90% of those sales came through partners demonstrating continued success in our channel, both the new on-premise customers are through our EMEA team and partners. They include a very large Middle Eastern petroleum and natural gas company, brought to us by a partner, ENPRO, in the Middle East. And kubus IT, a new customer brought to us by partner Unicon in Germany. The EMEA team maintains their momentum into Q2 having already closed the deal with the new client, Groz-Beckert, also based in Germany. As you know, late in 2018, we also announced an important new partnership with British Telecom. We’re engaging on multiple active projects with BT and are well on our path to begin monetizing our new relationship in the second-half of this year. And, of course, we continue to engage with key partners like AVI SPL, V-cube in Japan and Whitlock. In fact, we are nearing closing yet another key deal with Whitlock in Q2. The second pillar of our strategy is customer success and retention. I had mentioned our 92% customer retention, the success in extending our footprint with existing customers. Notable customer expansion during the first quarter included Dow Chemical, AT&T and Centene. Our success in part is due – is our ability to connect with our customers. And Qumu’s Annual Customer Summit provides a great opportunity for both customers and prospects to learn from a network fellow enterprise video innovators. In fact, we are featuring a few of our most innovative customers at our U.S. Summit tomorrow in New York, including a major Japanese automotive manufacturer, a top health care provider and leading global financial firms. You’ll find more on our website if you’d like to join us in London. The third pillar of our strategy is market-focused product innovation. Less than two years ago, Qumu launched a new open end modular architecture. The first big advantage of this is to open up the input side of our platform. Our Unified Communications Gateway makes it easy to integrate with almost any videoconferencing platform, such as Pexip, Skype for Business, Microsoft Teams and now Zoom, which had a video and – act as a video input source as they take advantage of Qumu’s streaming and video management services. We also opened up our delivery in our output side of our platform. I’d like to talk about three important trends we are seeing now because of the important decision to release our delivery software engine, Pathfinder, as a stand-alone enterprise CDN or content delivery network. First, customers are upgrading there pure SaaS Qumu Cloud solution to hybrid to take advantage of Pathfinder’s intelligence, enterprise grade, security and delivery. Second, existing customers are expanding their Pathfinder footprint to create more reach and security, adding new Edge nodes, improving video quality across their enterprise. Vodafone, who I mentioned earlier, has more than 90 Qumu Edge nodes across their global network. And third, customers are replacing their existing public CDN with Qumu’s proprietary Pathfinder solution. Pathfinder in its edge computing technology provides a vital competitive advantage of our enterprise customers solving towards distribution – distributed computing and video-first communications. And our fourth pillar is financial strength. Since I’ve already covered the highlights for our financial results, I just wanted to thank the entire Qumu team for their steadfast commitment to focus on great work that delivers results. Now over to Dave for further financial commentary.

[Dave Ristow:]

Thank you, Vernon. We had a strong start to 2019 building on the momentum of 2018. I’ll highlight a few of our positive financial trends. Revenue for the quarter was $7.1 million versus $4.8 million in Q1 2018, a 47% year-over-year increase. This was largely driven by subscription, maintenance and support revenue, which was $5.6 million versus $4.0 million in Q1 2018. This is a 40% year-over-year increase, of which, $1.3 million was derived from term license renewals. Gross margins were 78.3% versus 56.3% in Q1 2018, a 39.1% increase year-over-year. Total operating expenses were $6.0 million versus $6.5 million in Q1 2018, a 7.7% year-over-year decrease. We achieved another quarter of positive adjusted EBITDA, a non-GAAP measure, marking our third quarter of positive adjusted EBITDA out of the last four quarters. Adjusted EBITDA was $210,000, compared to an adjusted EBITDA loss of $2.9 million for the first quarter of 2018. Our renewal rate is performing well at 92% and cash remains strong at $8.6 million. These results give us a high degree of confidence. Each quarter, we evaluate our annual guidance. We specifically monitor the size and timing of perpetual license opportunities as well as growth in our subscription business and bookings. At present, we are confirming our annual 2019 financial guidance as follows

[Vern Hanzlik:]

Thanks, Dave. To wrap it up, I can say that we can see the benefits of transforming Qumu’s technology and business over the past several years. The first quarter of 2019 showed continued success of Qumu on multiple measures, including strong revenue growth, the third quarter of positive adjusted EBITDA [less for] continued channel growth and 90% contribution to sales in the quarter and expansion of our international footprint, including major customers in Germany and the Middle East, and our maintenance of our customer retention levels above 90%. We have a high degree of confidence regarding our optics into the sales pipeline through the first-half of the year and into the second-half of 2019. We also have confidence in our ability to drive towards achieving a positive adjusted EBITDA. With this outstanding outlook, our focus will continue to be – our focus forward will be aggressively evangelizing our new intelligent video platform, so that we can capitalize on the market opportunities presented by our technology leadership remain laser focused on solving tough problems of video in the enterprise; and new opportunities with the rising of our Pathfinder technology to be the foundation of the enterprise CDN for customers; continue to grow and monetize our channel relationships, particularly with the new partner British Telecom as the relationship continues to develop; build upon our momentum we’ve achieved with our financial results; find and close the opportunities created by our videoconferencing explosion, it’s conversion with the enterprise video. Now, let’s open up the call for questions.

[Operator:]

Thank you. [Operator Instructions] And our first question comes from Jeff Van Rhee from Craig-Hallum. Your line is now open.

[Jeff Van Rhee:]

Great, thanks. Congrats, guys. Looks real nice here. So a couple of questions, maybe just on the subscription maintenance support line of $5.6 million in the quarter, I just want to be clear, Dave, you touched on a comment in there, said, there was something about $1.3 million in term license renewals in there. I would think if it’s a term license, it would go in license, if it’s the maintenance portion of that license, that would fall under maintenance year and would be taken ratably. So just want to confirm all that. And then is the $5.6 million that you posted here, the good run rate or for whatever reason, is that expected to be down sequentially?

[Dave Ristow:]

Yes, Jeff, thanks. Both good questions. So I’ll point you to the supplemental financial information and the summary of revenues. So within the subscription maintenance and support line item, that growth from $4.0 million to $5.6 million on a rounded basis within that line item, there’s $1.3 million of term license renewal. The basis for the accounting treatment behind that is following ASC 606, whereby a term license upon expiration and then our extension of that is effectively a new agreement and under that guidance, it’s treated as term license. And so as a result, appears within the subscription maintenance and support line item. And then as it relates to your question was OpEx, right? And whether or not that was going to – from a sequential basis continue to decrease, is that the question?

[Jeff Van Rhee:]

No, no, it was – so the question was that subscription maintenance and support line from $5.6 million sequentially, how do you think about that behaving?

[Dave Ristow:]

Yes. I think about it from a – if you take the $5.6 million, back out the $1.3 million, effectively you’re coming in about $4.3 million, and essentially, the base that we’re continuing to build from as we build out essentially that cloud hybrid, which is SaaS-based revenue. If there are additional term license renewals that will happen, because we do have a handful of those in our customer base, you’ll see and this is attributable to the lumpiness historically of the business, those will pepper in from time to time just as those come up for renewal. And it really depends on whether or not we convert those folks over to SaaS hybrid or if we wind up taking ASC 606 treatment against essentially a term license renewal. It depends on the nature of the underlying contract with the customer.

[Jeff Van Rhee:]

So my understanding on term deal, is this is a multi-year term deal that’s taking ratably over the period of the term, or just it’s like this – it sounds like you’re saying this is a one-time hit, usually if you get a three-year term licenses, is taking ratably over those three years, I could see how that would fall under subscription or recurring, but just a little more clarity?

[Dave Ristow:]

Yes, because of the fact that the licenses itself is locked to a term, it’s treated as perpetual license under the new accounting guidance. It was – that was – if you just back up a year to this quarter, you’ll see that essentially in the details of our financials, we call out the fact that term licenses, because effectively ownership is transferred and it’s limited to a – to that specified period, whatever that term is, it’s treated as perpetual. You’re going to get a one-time incremental pop in the quarter, when you book a new term license. And then upon renewal, you’re going to wind up also taking a pop if you are at the end of a term. So it is a one-time, hence the reason that we’re calling this out $1.3 million incremental pop in the current quarter for that – for those renewals, the term license renewals.

[Jeff Van Rhee:]

Okay. And this customer has been a customer for how long?

[Dave Ristow:]

It was actually two customers in there, and they’ve all been customers for greater than five years.

[Jeff Van Rhee:]

Okay.

[Vern Hanzlik:]

And their three year extensions too, Jeff.

[Jeff Van Rhee:]

Okay. Okay, got it. And then let me see here, so – and then on the balance sheet, just quickly the contract assets, just help me understand what that is sequentially?

[Dave Ristow:]

Yes, so contract assets relate to essentially the assets under 606. So to the extent that we’ve got long-term commitments from our customers under 606 is when that contract asset line appeared. And so it’s the fact that we’ve got these large three-year contracts with the multi-years. It ties under your same question around the term license renewal.

[Jeff Van Rhee:]

Got it. Got it, it’s helpful. Okay, great. And obviously, with Zoom and sort of the – just explosion of video in general, it’s just been an ideal solution area for what you’re looking for. But maybe just talk a little bit more about what’s going on in the pipeline? I think, you commented that pipe coverage again was over $3.5 million.

[Vern Hanzlik:]

Yes.

[Jeff Van Rhee:]

…but the deal types, the sizes, the use cases, just maybe a little bit more clarity on what is going on in that pipeline would be helpful.

[Vern Hanzlik:]

Well, it’s still the mix. We’ve got some significant new hybrid deals, Jeff, that also add the – what I would call the gateway and the delivery piece. We have expansion in our base, which is expansion on the delivery components, as I mentioned. Then we have just new customers – new cloud customers, our Japanese partner continues to bring new cloud opportunities in. So it’s a real mix of our land and expand with the cloud and then hybrid is an emerging component, and then we have people that are still looking at our on-premise platform for behind the firewall, mostly in healthcare and in financial, where we’re doing proof-of-concepts. And I think that the explosion piece on the videoconferencing is that, people have these things, they are testing self-service. The example that I reviewed with Vodafone is really – that’s been underway for almost a year of trying to drive not a white glove service to self-service. And that’s where these videoconferencing interfaces are providing a mechanism that they’ve already invested in and then we’ve built the infrastructure under that. And we’re selling, it’s a software-only with our gateway product to be able to enable that and the other thing you can build out the delivery network beyond that. And so those are the areas that we’re – that are coming into the pipeline. They are converting and we’re testing and we’re going to be able to do that with our SaaS offering to be able to drive that. And its – we’ve got customers that want these interfaces, whether it’s Zoom or it’s Pexip or it’s Skype for Business, they want to see them, its user experience and all those things to – for success. So it’s an exciting component and we add value to that ecosystem, which is really the most important piece. And when you get on a private network, that’s when those systems fall down if they overtake the network with too much video.

[Jeff Van Rhee:]

Okay. And then on the customer satisfaction side, I think, you commented on the retention in the low-90s. What do you do? How are you systematic about measure, engaging, tracking customer satisfaction with your overall solutions on an annual basis? How do you do that operationally?

[Vern Hanzlik:]

We do surveys. We – right now, we run probably 20% to 25% response on our surveys. We ask a series of questions. We try to do it monthly, but it’s just a – it’s – but operationally, it comes out of our customer success group. They reach out to the customers, whether – no matter what the platform they are running, and we get their feedback and we record it, we analyze it and track it. It goes into product enhancements, it goes into just customer sat in general and making sure that we’re listening to the customer base. But we’ve got a 24/7 group that works worldwide to be able to harness that.

[Jeff Van Rhee:]

If a customer, say, a top 20 customer and they’re choosing not to respond to the surveys, is – are they – is there still a sort of systematic way to make sure you’re touching them and getting feedback on an annual basis?

[Vern Hanzlik:]

Well, that’s more on the account manager side. Those people are touching those folks from that perspective. And then we look at the – who is calling the support line. Are they having an issue and they are just not responding? And we’re trying to get those types of analytics, so that we know who is and who isn’t. And if – when we don’t have response, we have people that are reaching out to go out, and that’s our account management group. That’s really more of a – we refer to as farmers in our commercial group that’s working with these folks.

[Jeff Van Rhee:]

Yes. So in the context of responding on their own to the survey, as well as account manager making sure they’re touched, the short answer is that at least all 20 of them are going to be touched and done feedback from at least once a year?

[Vern Hanzlik:]

Yes, absolutely. Yes. And the thing is that we have another site within the organization that people can add their own comments on product enhancement and things like that, and it’s really sanitizing and reviewing all that stuff and making sure who that is. And usually have – I mean, for us it’s – our top 30% of our customers are the most vocal and we’re trying to get to that – the bottom 70% that are just running and things are working great, so that’s a continual thing.

[Jeff Van Rhee:]

Okay. And then last for me just on the bookings side. I mean, obviously, from the guide standpoint, by not raising, it implies sequential drop and just a ton of conservatism for the remainder of the year in light of the $3.5 million coverage range. But can you just talk about the bookings this quarter? And put it in some context compared to last quarter, last couple of quarters. Outside of this large term license that sounds like it’s – obviously, it’s going to be a recurring thing at least the three-year deal. But outside of that, given the $3.5 million coverage coming into the quarter, how did you perform from a booking standpoint?

[Vern Hanzlik:]

I think from – our plan internally, Jeff, we are probably about 80% on where I wanted to be on the bookings and we’ll make some of that up in Q2. But the big numbers that we put in as revenue or bookings of last year, so they didn’t – they’re not equated to this year. So just to be clear on that. And I think that from a pipeline perspective, it’s the – what turns into revenue, which is things that we get early in the quarter from a SaaS perspective. And I think, where we’re being more conservative on – where we’re guiding to right now is that mix of SaaS revenue versus on-premise expansion or net new on-premise customers. And we’re just evaluating that and we’ll take a really hard look at it at the end of Q2.

[Jeff Van Rhee:]

Evaluating in the sense that maybe more of it is going to ratable as opposed to premise, is that what I read there?

[Vern Hanzlik:]

That is correct, yes. And we’re just trying to be – so that we’re setting the right visibility of what’s coming in, in the quarter and making sure we’re managing that expectation to the market.

[Jeff Van Rhee:]

Yes. And how about the context of the bookings versus prior quarter? Because again, last quarter, it was the first time you’ve commented to the fact that, that booking coverage number jumping up to the mid-3s to something down to the 2s. How did that translate last quarter from a booking standpoint?

[Vern Hanzlik:]

We – some of them pushed into Q2, but I mean, it’s still a good coverage number. I mean, I think that we’re looking at the coverage of what’s converting to revenue and that – whether that’s ratable or on-premise and the conversion is good. I think that I always want better, but I think that we’re seeing a lot coming into the pipe and then net new stuff coming out of our customer base and expansion as we’re marketing to them and people learning more, how they can take advantage of the platform.

[Jeff Van Rhee:]

Yes, I guess, I phrased the question poorly. You were – you’re saying you hit roughly 80% of what you’re looking for – this quarter outside of that one big-term deal. And by last quarter, I guess, I was referring to the December quarter. Just any context of bookings this quarter versus bookings in December quarter was – what I was looking for?

[Vern Hanzlik:]

Oh, yes. It’s about – I mean, it’s about half of what – I mean, but we see a build up. I mean, it’s from a booking’s perspective. So – but I think on our plan of what we wanted in bookings, we were about 80% on the bookings number. So that booking, that – those don’t always turn into revenue within the quarter. And just so where I’m clear on that.

[Jeff Van Rhee:]

Yes. [Multiple Speakers]

[Dave Ristow:]

And Jeff, just for a bit of context, if you go back to Q1 2018, we finished about $1.4 million on the bookings. We were about $2.8 million, certainly not everything that we wanted, but to the extent that we’re looking at essentially good coverage with that pipeline. It’s – we’re not raising guidance at this point, but we feel really good about where we’re at.

[Jeff Van Rhee:]

Yes, very – obviously, very, very strong start to the year cash flow, earnings, EBITDA, I mean, all of that in particular in light of where you left the guidance looking extremely doable for the remainder of the year. So that’s all I have. Thanks so much, guys. I appreciate it.

[Vern Hanzlik:]

Yes. Thanks, Jeff.

[Operator:]

Thank you. [Operator Instructions] And I’m not showing any further questions at this time. I’d like to turn the call back to over to Vern Hanzlik, President and CEO, for any further remarks.

[Vern Hanzlik:]

Thank you, again, for joining us, and have a great day.

[Operator:]

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes today’s program. You may all disconnect. Everyone, have a great day.