Qumu Corporation
Q2 2019 Earnings Call Transcript

Published: 31 Jul 2019

[Operator:]

Good afternoon, ladies and gentlemen, and welcome to the Qumu Second Quarter 2019 Conference Call. [Operator Instructions]. I would now like to turn the conference over to your host, Mr. Dave Bristow, CFO. You may begin your conference.

[David Ristow:]

Thank you. Good afternoon, everybody, and thank you for joining our second quarter 2019 earnings conference call. After the market closed, we issued a press release announcing our results for the second quarter ended June 30, 2019, a copy of which is available on the Investor Relations section of our website at qumu.com.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 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 Form 10-Q and our financial results press release, for a more detailed description of risk factors that may affect our results.During our call today, we will discuss adjusted EBITDA, a non-GAAP financial measure. In our press release and our filings with the SEC, each of which is posted on our 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 from or substitute for or superior to GAAP results. We encourage you to consider all measures when analyzing the company's performance.Now with that, I'll turn the call over to Vern Hanzlik, President and CEO of Qumu.

[Vernon Hanzlik:]

Thank you, Dave, and welcome, everybody. I'd like to open with a few comments and then hand the call back to Dave for more details on the numbers. When Dave is finished, I'll review our progress against our strategic plan. Although we saw solid year-over-year improvement in our gross margin percentage and reduction in operating expenses, Qumu experienced a bit of quarter-to-quarter lumpiness that can be characteristic of our business due to a few key deals being deferred as a result of customer internal process. These temporary delays resulted in lower revenue than anticipated at $5.4 million compared to $7.6 million the same period a year ago and negative adjusted EBITDA at $1.4 million.That said, most deals that were expected to close in Q2 have already closed or are tracking to close in Q3, and we'll continue to execute against our long-term growth plan. Additionally, I'm happy to report that several of our key factors enable us to remain highly confident in our ability to meet or exceed our annual guidance for 2019.First, our sales pipeline remains healthy and robust, giving us additional confirmation in our effectiveness of sales and marketing programs, which has us well positioned to close additional deals throughout the remaining of the year.As we speak, we currently have 10 active proof of concepts running with various promising prospects. A proof of concept or POC is a pilot project that allows customers to deploy our full solution in a live environment prior to making a purchase commitment. We like POC's opportunity because they show the customer's commitment to the solution, and they get to see our team and our platform in action. This immediately places us in an advantage because both our solution and our knowledge of the enterprise environment stands out. This is the highest number of active POCs I've seen in 4 years as President and CEO.We signed 8 new customers in the third quarter and continued to win large contracts with the Global 2000. These deals also include deployments of some of the newest technologies such as Unified Communications Gateway and hybrid cloud.With the growing mix of new subscription-based business, gross margins have steadily grown, reaching 71% for the quarter. Our customer retention is in an all-time high at 93.2%. Also, on the channel side, Qumu recently passed British Telecom's astringent onboarding requirements of our solution and now is a key component of BT's managed video service, which should provide additional growth in the quarters ahead.With a solid foundation, we remain bullish on long-term opportunities for Qumu as the video becomes business-critical and even mission-critical for large enterprises. We're also steadily widening our technology lead over the competition as we successfully transition to a recurring revenue model with 80% of our new customers in 2019 representing high-margin SaaS-based contracts.One of the most concrete examples of our ability to distinguish ourselves from our competition is throughout the focus of innovation on the cloud, in particular Qumu's intelligent video platform combined with the Pathfinder delivery technology and Unified Communications Gateway with Qumu Cloud to create a hybrid solution that makes all video more manageable, scalable and usable for the companies.That's the thesis of our intelligent platform. Regardless of the video -- where the video comes from, the Qumu platform will handle it, manage it and deliver it. As a result, we are regularly unseating direct competitors in large-enterprise deals, which speaks to the quality of our offering and bodes well for the future.Now David will review the financial highlights for the quarter.

[David Ristow:]

Thank you, Vern. I will comment on a few financial highlights. On a year-over-year, year-to-date basis with nearly identical revenues, Qumu achieved improved margins, operating loss and adjusted EBITDA. Our gross profit improvement reflects the better margins associated with transitioning to a subscription-based business. The operating loss improvement also reflects the benefits of real cost reductions, not just the timing of expenses. Combined with improved pipeline coverage of 3x revenue and customer retention, which is at an all-time high at 93.2%, we are positioned for a strong second half of 2019. Total revenues were $5.4 million for the quarter ended June 30 versus $7.6 million during the second quarter of 2018. Year-to-date, total revenues were $12.5 million for both the 6 months ended June 30, 2019, and the 6 months ended June 30, 2018.Software license and appliance revenue was $689,000 and $2.9 million for the 3 months ended June 30, 2019, and 2018, respectively, and $1.7 million and $3.3 million for the 6 months ended June 30, 2019, and 2018, respectively. Please recall that in Q2 2018, we closed 2 significant perpetual license deals.Offsetting the -- for the negative impact of experience and the timing of software license and appliance revenues, we are continuing to expand our subscription-based component of our overall revenues. Subscription, maintenance and support revenue was $4.2 million and $4.1 million for the 3 months ended June 30, 2019, and 2018, respectively, and $9.7 million and $8.2 million for the 6 months ended June 30, 2019, and 2018, respectively, which year-to-date is comprised of 47% SaaS revenue and 53% annualized support and maintenance revenue. During the quarter, we secured a number of major SaaS deals, including the following, which is one of the largest railroad companies, which signed a 3-year contract for hybrid cloud deployment. The deal represents $225,000 in annual contract value or ACV, and total contract value or TCV of $675,000, which is to be recognized over that 3-year term, coupled with the fact that we displaced the major competitor in this deal. This is a great win for Qumu.We also secured a major financial institution that signed a $350,000 deal for our Unified Communications Gateway software, which is the largest transaction for that component of our -- to date and further validates our self-service strategy.Getting a bit more granular on the delayed deals that Vern mentioned a minute ago. The first deal was with a leading financial institution that has since signed their -- they signed a contract in early July. This closed opportunity represents a 3-year deal with a $438,000 ACV and a $1.12 million TCV. A second deal with a leading telecom provider also signed in July with a $429,000 ACV and a $682,000 TCV, along with other smaller deals that have also already closed in July. Two other significant deals that were delayed in Q2, one with a pharmaceutical firm and the other with an insurance leader, have already been awarded to Qumu and are expected to close sometime in this quarter.And transitioning from revenue, gross margin for the second quarter 2019 was 70.9% compared to 68.5% for the second quarter 2018. Gross margin for 6 months ended June 30, 2019, was 75.1% compared to 63.7% for the 6 months ended June 30, 2018. The change in gross margin compared to the prior year periods was favorably impacted by increased term license revenue in the first quarter and our transition to a SaaS subscription business. Cash and cash equivalents totaled $7.3 million as of June 30, 2019, compared to $5.2 million as of June 30, 2018.Moving on to operating expenses and adjusted EBITDA, a non-GAAP measure. We continue to diligently manage our expense structure, significantly improving operating expenses. Compared to the corresponding year-to-date period from last year, total operating expenses decreased 5.6% for the 6 months ended June 30, 2019.Adjusted EBITDA was negative $1.4 million for the 3 months ended June 30, 2019, compared to positive $71,000 for the second quarter of 2018. Adjusted EBITDA for the first 6 months of 2019 was negative $1.2 million versus negative $2.8 million in the first 6 months of 2018. This is a $1.6 million improvement on similar year-to-date revenues.Net loss and loss per diluted share were negatively impacted by a warrant liability as the performance of our stock price, which improved from $2.45 per share on March 31, 2019, to $4.15 per share on June 30, 2019, drove a $1.4 million increase in our warrant liability in corresponding noncash expense for the quarter.Moving to guidance. Each quarter, we evaluate our annual guidance. We specifically monitor the size and timing of perpetual license opportunities as well as the growth in our subscription business and bookings. As Vern previously noted, we remain confident in our annual 2019 financial guidance.To reiterate, we intend to deliver annual contract value bookings growth of 20% to 25% in 2019 over that of 2018, revenue for 2019 of approximately $27 million, gross margin percentage in the high 60s to low 70s, net loss for 2019 of approximately $5.1 million and adjusted EBITDA for 2019 of approximately negative $1.5 million.Forecasted adjusted EBITDA for 2019 excludes forecasted interest expense of approximately $1 million, income tax benefit of approximately $200,000, depreciation of expense of approximately $300,000, amortization of acquired intangible assets of approximately $1.2 million, stock-based compensation of approximately $900,000 and an increase in warrant liability of approximately $400,000.In summary, we remain confident in our 2019 annual guidance, and we will be working hard for our shareholders to deliver continued successful results throughout the balance of this year.Now I'll turn it back over to Vern.

[Vernon Hanzlik:]

Thanks, Dave. Just recently, Qumu had our annual Customer Summit in New York and London. These annual events are where our customers, most of whom are video innovators, come together to discuss what they're doing with our platform, and they deliver feedback on their experience with our product. My biggest takeaway from these events are as follows. One, for our customers, video is not just business-critical, it's mission-critical. Just weeks ago, a Top 3 worldwide online event used our platform to watch a highly anticipated new car model.Two, our customers believe in Qumu, and they count on us to solve complex challenges in delivering, managing and scaling video across the global enterprise. And three, they believe in us because we have perfected the size of live video broadcast to tens of thousands of employees across the global organization. These events are typical executive webcasts or town hall meetings, and they are the hardest things to do in video because of scale because global corporations networks are very complex and unique.Video is like a renewable, reusable energy resource for business, and the innovators know it literally energizes workforces and differentiates their business. We help them generate video, store it, manage it, stream it and channel it to everyone who needs it, even if it's 150,000 employees all getting it now over existing networks. To give you an example, as I mentioned earlier, we recently had a major financial institution sign a large 3-year deal with Qumu. Their solution centers around our strongest use case, live scale executive broadcast webcast and management of their massive video portals of demand content. To us, this usage and processes are what we live and breathe everyday. It's no issue.But for our customers, there were problems that no one else could solve. To close this opportunity, we displaced a major competitor in enterprise video space for a simple reason that their system could not reliably handle the scale. Going forward, we anticipate expanding into other areas and use cases with this customer, which -- at the core tenant of our land and expand strategy. That's where we win, doing the hardest things to solve the largest problems against -- again and again. From the position of strength in the enterprise, we're expanding beyond the cloud and into the videoconferencing arena. Now as a reminder, Qumu does not provide consumer video solution. That's what YouTube and Netflix do. But we do make business video easy as YouTube and Netflix. We also do not provide videoconferencing or video meeting solutions. Instead, we enhance what videoconferencing players like Zoom, Skype for Business or Microsoft Teams can do.For example, the Qumu platform significantly extends the reach of Zoom by allowing any Zoom user to expand a standard small-scale meeting into a large-scale webcast, reaching tens or even hundreds of thousands of participants. In addition, the Zoom session can be recorded, stored and managed by Qumu platform. Whereas Zoom has positioned itself as a better way to have an online meeting, the Qumu platform can turn the Zoom into a full-featured streaming engine that is not only scalable but also secured, searchable, editable and caption-enabled. And of course, Qumu can do this for any videoconferencing system.To summarize, Qumu is in a great position for growth because we are the best of what we do and we bring tremendous value to large enterprises who need to innovate with video. We help them get more out of their existing corporate networks and their investment in videoconferencing.Now I'd like to report the progress against our four pillars of our strategic plan before we open up the call for questions. Our first pillar of sales -- our first pillar, sales execution and new customer growth. Our marketing team has zeroed in on what works for attracting new customer opportunities, keeping our sales pipeline strong at now more than 3x revenue coverage for 2019. However, the point at which marketing and sales converge is where we have the greatest improvement in recent quarters. Although a collaboration approach -- through our collaboration approach, sales and marketing teams have developed and coordinated processes that involve qualifying and tracking leads long before they're handed off to sales.In addition to recently adding another individual to lead a qualifying station, we have implemented 4 additional stages that we can track before the leads go to sales. This provides tremendous transparency into existing opportunities. I can personally find out in seconds of how many opportunities are progressing, for the customer, first inquiry to the close.It's the kind of the visibility into our opportunities that excites me about the business. Last quarter, I mentioned we were near closing our second-largest deal through a partner Whitlock. This deal is the same U.S. railroad company that Dave mentioned earlier, which we closed in June. As Dave mentioned, this agreement includes our Unified Communications Gateway and the hybrid solution, which is the use cases of live webcast, training and onboarding our new -- onboarding new employees. Also, as I stated earlier, our new relationship with British Telecom is moving forward as we drive towards monetizing the relationship in the second half of this year. Qumu solutions are now part of BT's white glove managed streaming service for its voice and videoconferencing customers who seek a turnkey solution to produce both live and on-demand video events.The second pillar in our strategy is customer success and retention. I mentioned our company recorded a 93.2% customer retention and success in extending our footprint to existing customers. Notable expansions during the second quarter included a large New York bank, a large Middle Eastern oil provider, Gherkin [ph] Medical in Japan and Groz-Beckert in Germany.Of course, customer service is the key to making these expansions happen. During the quarter, we received a major recognition before our service and support excellence. Qumu is named the 2019 Gold Stevie Award winner as a customer service department for this year in a computer science category. With -- the past winners of the Gold Stevie Award included Google, Optum Health, Zappos.com and Aflac. I find this award extremely gratifying because it underscores our service excellence in best-in-class and continues to be the barrier of entry for some of our Internet-only companies who only deliver support via online chat. Our service reputation is a major reason customers choose Qumu over competitors, and they stay with us because we live up to our reputation every day.The third pillar in our strategy is market-focused product innovation. During Q2, we completed many product improvements and updates that brought our next-generation intelligent platform to general availability. We also rolled out our new advanced analytics for our hybrid deployments. One key advantage of our new open intelligent video platform is how quickly we can integrate with new technology partners. The most recent example is our new integration with CaptionHub, a leading AI-based captioning solution providing automated captioning and real-time translation of videos, which is a major gating factor in the ability of global teams to collaborate. The new CaptionHub integration provides another major competitive advantage for Qumu and is a great example of building intelligence into our video platform.Our fourth and final pillar is strengthening our financials. Qumu has continued identifying and implementing new improvements and resource to drive down the expenses, increase product capability and service levels for customers and ultimately provide incremental savings to reinvest in revenue generation.To wrap up, while second quarter sales were impacted by delays in closing key deals, all of which are either closed or in the final stages of closing, we are highly confident in our expectations for growth in the second half of 2019. Our focus going forward is unchanged. We will aggressively evangelize our new intelligent video platform so we can capitalize on the market opportunity presented by our technology leadership. We will remain focused on solving tough problems of video in the enterprise and maintaining retention above 90%. We will continue to grow and monetize our sales channel relationships, particularly the new partner British Telecom as that relationship continues to develop. We will regain the momentum of our financial results, and we will find and close opportunities created by the videoconferencing explosion and its convergence with enterprise video.Now let's open up the call for questions.

[Operator:]

[Operator Instructions]. Your first question comes from the line of Jeff Van Rhee from Craig-Hallum.

[Rudy Kessinger:]

This is Rudy on for Jeff. Several questions for me. So first, Vern, the proof of concepts that you mentioned, the 10 proof of concepts that you have, this is the highest you've had in 4 years. Can you give a little bit of color? What -- are those trending toward the same size they've been seeing or are they trending to -- towards bigger sized deals? Or just a little bit of color there on what you're seeing in terms of those proof of concepts.

[Vernon Hanzlik:]

Well, I think that there's some average deals in there than there's larger deals in there, Rudy, so it's a mixed bag. So I would say that it's 1/3 of large deals, 1/3 of medium and 1/3 of just what I would call entry level. So it's a mix of our -- where people are testing hybrid cloud and they're running that, and then we have people testing behind the firewall which are larger transactions. So it's about 1/3, 1/3, 1/3 right now.

[Rudy Kessinger:]

Okay. Got it. Got it. And then pipeline coverage, Vern, I think you I heard you say that's currently at 3x. And I believe 2 quarters ago is when you guys first had 3, 3.5x. And I think you reiterated it last quarter. So do I have that right, been at -- more from 3.5x to now it's 3x? Or is it still 3.5?

[Vernon Hanzlik:]

Yes, that's right. That's right, Rudy. You got it right.

[Rudy Kessinger:]

And then in terms of sales cycles, compared to, say, 6 months ago, have you seen any change in the length of sales cycle either accelerating or taking longer? I know you had some deals in the quarter that are being pushed out from individual customers and internal operations. But overall, have you seen the sales cycle lengthening? Or is it still trending about the same?

[Vernon Hanzlik:]

There's two comments. One, it's very competitive. So I think the sales cycles are kind of the same when you're in a proof of concept and they're testing other vendors. I think that where we see the delays mostly, it's internal processes for these large corporations to get everything signed and inked and so that we have the right revenue recognition.I think that the competitive nature of the sales cycle is about the same depending on the size of the deal. It's either 2 or 3 vendors you're competing against. And that's why we like the proof of concepts. Those are higher percentage wins for us and the customer gets to take -- they go through the process. So I would say it's not changing. I think it's more where we get the delays with the internal processes and contracting and making sure we have all the Is and Ts crossed the right way.

[Rudy Kessinger:]

Got it. Got it. Okay. And then also moving forward, I guess you can say compared to 6, 9, 12 months ago, the expectations or -- I guess your guys' visibility into what percentage of new bookings are from here on out? Did they come from cloud versus hybrid versus on-prem?

[Vernon Hanzlik:]

Well, I think we're seeing that this year, all -- our new customer, about 80% of them are SaaS. And so I think that's the one thing that we are seeing. But I mean the expansions that we're seeing in our existing base will be behind the firewall or delivery or it's an add-on to a cloud. And then we'll see some transition from on-prem to our hybrid, which is a SaaS, cloud and hybrid-able SaaS. So we're just seeing movement going on to SaaS. From a fundamental perspective, people want to test those solutions, make sure that they can scale on all those types of things that are important to these larger customers. But we definitely see the movement to SaaS.

[Rudy Kessinger:]

I understand. I got a follow-up to that and then one last quick one for you. So within that 80% SaaS, you were able to break out or break down what percent of 8% is hybrid versus pure cloud?

[Vernon Hanzlik:]

I would say that it's probably 50-50 right now.

[Rudy Kessinger:]

Okay. Got it. That's helpful. And then just lastly, the British Telecom partnership. So it's had -- I heard it, that partnership is now up, live, running, they're fully ready to go, at least had a product, into their customers. What is -- with as much visibility as you guys have at this point, if we look 6, 12 months out, what do you think this partnership can bring in terms of incremental revenue over, say, the next year, if you're comfortable giving any color there as...

[Vernon Hanzlik:]

I don't know if I'm comfortable giving the number yet. I think that it's -- if I push it out 18 months, it can be significant to us. But we're optimistic about -- we knew that we set the expectation low for this year for the second half. We'd see more out of it in 2020 because there's more of a ramp-up. But it took us this year to kind of get the onboarding piece to get it in the price book, get certification so that you can -- they can turn it on and use it as a service and then also resell. So I think as we get into it, Rudy, through the end of Q3 and into Q4, we'll be able to get more predictability on the forecast, but I'm not comfortable at this point quoting any numbers until we kind of start to hold them more accountable to the forecast that they were sharing with us right now.

[Operator:]

[Operator Instructions]. I am showing no further question at this time. I would now like to turn the conference back to Mr. Vern Hanzlik, President and CEO.

[Vernon Hanzlik:]

Thank you again for joining us, and have a great rest of your week.

[Operator:]

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect.