Qumu Corporation
Q2 2018 Earnings Call Transcript

Published: 5 Aug 2018

[Operator:]

Good day ladies and gentlemen, and welcome to the Qumu Second Quarter 2018 Conference Call. [Operator Instructions] As a reminder, this conference may be recorded. I would now like to introduce your host for today’s conference, David Ristow, Chief Financial Officer. Sir, please begin.

[David Ristow:]

Thank you, Norma. Good morning everyone, and thank you for joining our second quarter 2018 earnings conference call. Our comments today may include forward-looking statements related to our expectations, plans and prospects. These statements are based on information available to us at the time of this presentation and by their nature, involve risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Risks and uncertainties associated with our business are described in our most recent Annual Report on Form 10-K. Any unreleased features or services referenced in this presentation or other public statements are not currently available and may not be delivered on time or at all. Customers who purchase our products or services should make sure that their decisions are based on features that are currently available. We assume no obligation to and do not intend to, update any forward-looking statements. Now I’ll turn the call over to Vern Hanzlik, Qumu’s President and Chief Executive Officer.

[Vern Hanzlik:]

Thank you, Dave and welcome everyone. Qumu’s second quarter 2018 was a fantastic quarter by all key financial metrics. Revenues were 7.6 million for the quarter, compared to 6.7 million in the second quarter of 2017, which is an increase of 15% year-over-year. Our Q2 sales were led by bookings of two, seven figure health care deals, involving one new customer and one existing customer, further building on our strong position in healthcare and life science vertical. In addition, we landed in as high six figure deal with a major financial services company through our Japanese partner, Fujitsu and iStudy. This large enterprise transaction, along with iStudy’s $1 million commitment to Qumu in 2018 further validates our partnership strategy and our investment in the Asian market. We look forward to even more opportunities like this one as these two valuable partners continue to introduce Qumu to new opportunities in the Asia Pacific region. Continuing on financial highlights; Qumu’s second quarter annual bookings were 5.2 million compared to 2.6 million in the second quarter of 2017. Additionally, I’m also very happy to report positive adjusted EBITDA of 71,000 and gross margins at 68.5. Recently, Qumu’s balance sheet was also strengthened dramatically as we monetized our stake in a company called BriefCam and provided significant cash to the business, allowing us to pay down 60% of our outstanding principal balance of our current debt. As we begin Q3, we’re seeing a surge in customer opportunities around the globe, and our marketing and sales organizations are working closely together to find and close them. As a result of these efforts, we added 15 new customers and expanded 27 existing customers in Q2. In addition, Qumu’s annual recurring revenue is approximately 16 million for 2018, which is comprised of 45% SaaS revenue and 55% annualized support and maintenance revenue. We’re also pleased to report 89.5% customer retention rates for 2018. Qumu continues to extend its advantage over the competition with a holistic distributed computing architecture called QX, which brings intelligence streaming to the enterprise environment and enhances existing enterprise computing and corporate collaboration platforms. I’d like to give you an example of this advantage within a Microsoft environment. The communication team inside one of our largest telecom customers currently provides 200 live video events per month to internal audiences on a full service basis. With demand anticipated to grow over 100%, the team needed a self-service option to complement its full-service capability. By deploying Qumu’s unified communications gateway, user can now conduct their own live streaming broadcast with tools familiar with them, including Outlook, SharePoint and Yammer and Skype for Business. They simply use Outlook to schedule their live video event as they would in any other meeting, then use Skype for Business for their recording streaming service, and under this scenario, both full-service and self-service webcasting solution using Qumu platform as the glue, one intelligent solution for streaming, recording, managing and securing all video across the organization. Last quarter, I mentioned our strategic plan on how it’s driving new energy and excitement at Qumu. Today, I can say the plan is driving results. Now I’d like to report on our progress at each of these four strategic pillars. I’ve already discussed the high points of one pillar, strengthening our financials. In addition to improving our top and bottom line, our balance sheet is now strong with much lower debt and improved cash position. Following the recent receipt of the BriefCam net proceeds, our pay down of the ESW in July, we have approximately 8 million in cash to provide flexibility in working capital for our business. The next pillar is sales execution and new customer growth. Our key objectives are to increase sales opportunities in our pipeline, drive more of those opportunities to final sale, and build our success with current customers. We are executing well on all of these objectives. As an example, last quarter, I highlighted a new healthcare customer. This was a highly complex deal involved from a marketing-initiated lead to a very quick close by our sales team within the quarter. This quarter, the same customer conducted their first highly successful CEO live event using the Qumu platform. Over 80% of the company participated in the CEO broadcast, and because we were able to rapidly demonstrate our value, we are already discussing expanding the account. Our lean and talented marketing team is playing a major role in building our pipeline by telling Qumu’s story, finding sales opportunities at a record pace. Our story is resonating with a variety of groups, including prospects, customers, industry influencers, which is keeping our pre-sales pipeline strong at 2.5 time sales. As I mentioned, our marketing and product strategy efforts are producing impressive results. Just a few weeks ago, Qumu was named by Aragon Research as a leader in the 2018 Aragon Research Globe for Enterprise Video. This is a powerful example of leading analysts, taking notice of Qumu’s technology and our standing in the video platform provider of choice to many of the world’s largest organizations. In its report, Aragon credited Qumu with generating strong momentum in the enterprise video space and specifically calls out Qumu’s key differentiators, our true end-to-end solution and our intelligent delivery network. We’ve received significant number of customer inquiries as a direct result of our leadership position in the Aragon Research Globe and from Frost & Sullivan naming Qumu the 2018 Global Enterprise Video Platform Leader in April of this year. We continue to receive honors from industry, media and are frequently featured in those publications. We’ve already received five awards and have been highlighted in 24 featured articles in 2018, to call out a few. We were awarded 2018 WebRTC Product of the Year award by WebRTC World, alongside BlueJeans Network and VirtualPBX. CIOReview named Qumu among top 20 enterprise communications solution providers for 2018, along with Microsoft and Oracle. Our content has been featured in publications such as Manufacturing Today Europe, HR Director Magazine, ITProPortal and even Automotive World. Also, our new live webcast series called the Video Visionaries Series, is receiving strong attendance from our target audiences. This new addition to our marketing program showcased our knowledge and demonstrates our product, Qumu Cloud, in action. The most recent topics included Team-to-Many, the new global video conference, driving user engagement and adoption of video in the enterprise and multi-cast video streaming. In addition to the tenacity pursuing leads generated by our marketing efforts, our sales team is aggressively advancing our direct sales and channel operations, while expanding our ecosystem of reseller partners. As a result, the sales organization has significantly proved its ability to convert these opportunities to sales. Our new customers, including AmeriHealth, Meiji Yasuda, an insurance company in Japan. Customers expanded including Vodafone, Centene, NHS Digital, Credit Suisse and Boehringer pharma. We are also doing more with our existing partners such as AT&T, British Telecom, Pepsi, V-cube and iStudy, who are making deeper commitments and working directly with us on lead generation. Last quarter, I highlighted iStudy, as a subsidiary of our Japanese partner, V-cube, which brought Qumu 1.5 million in bookings, plus 500k in revenue for Q2. British Telecom is planning to launch Qumu as a platform reseller and service provider focused on large enterprises globally. AVI-SPL has is signed as a platinum partner, and we recently conducted a joint webcast from the show floor of the InfoComm using Qumu Cloud and their ReadyCam product. We also added Genus Integration based in Toronto, our first Canadian partner. Our third pillar of the 2018 strategy is customer success and retention. Thanks to Qumu’s excellent support and product quality, our renewal rates remain high at 89.5%. Our customers speak out about their satisfaction, which is why Qumu was consistently placed near the top of Gartner’s groups peer inside rankings. Finally, our Customer Summits held in New York and London were a great success, providing a forum for customers to talk to each other about how Qumu helps them innovate with video. The fourth pillar of our strategy is market-focused product innovation. During the quarter, we made multiple product improvements, especially in the area of analytics and user experience. By consistently advancing QX, our open service-based platform, we are extending our competitive lead, which allows us to build our network of third-party developers and integrators. I also want to emphasize one thing. Our strategy is market-focused, as many of you know, there’s a perception in the market, and it’s headed from on-premise deployments to cloud deployments. But in reality, the market is headed toward distributed computing. Cloud, of course, is a key, but our on-premise will always be a requirement for many large enterprises where security and confidentiality are mandatory, particularly in financial services, health care and pharma. Our Pathfinder intelligent delivery product allows those types of organizations to have exactly what they need, a hybrid, distributed computing solution, and we are working hard to sustain the edge we’ve gained from the investing in our QX platform strategy. Now, over to Dave for further financial commentary.

[David Ristow:]

Thank you, Vern. I’ll comment on a few financial highlights. Throughout the second quarter, we focused on delivering revenue growth in the quarter with positive adjusted EBITDA. Combined with our BriefCam’s sale we continued to strengthen our balance sheet and reduce overall debt. Annual bookings for the second quarter were 5.2 million and 2.6 million year-over-year, an increase of 98%. Total revenues were 7.6 million for the quarter ended June 30, which was a 58% increase from the previous quarter and a 15% increase year-over-year. Qumu’s total annualized recurring revenue is approximately $16 million, which is comprised of 45% SaaS revenue and 55% annualized maintenance revenue. Software license and appliance revenue was $2.9 million and $900,000, respectively, for the three months ended June 30, 2018 and 2017, and $3.3 million and $2.1 million for the six months ended June 30, 2018 and 2017, with the increases attributable to both new license sales and expansion of existing customers. Subscription, maintenance and support revenue was $4.1 million and $5.1 million for the three months ended June 30, 2018 and 2017 respectively, and $8.2 million and $9.9 million for the six months ended June 30, 2018, and 2017. The year-over-year revenue comparisons were negatively impacted by approximately $246,000 and $443,000 for the three and six months ended June 30, 2018, due to the adoption of the new revenue recognition standard ASC Topic 606. Additionally, the loss of a large customer, which was previously announced in the fourth quarter of 2017, negatively impacted our year-over-year revenue comparisons by approximately $800,000 and $1.6 million in the three and six months ended June 30, 2018. Offsetting for the negative impacts noted above is growth in our core business and subscription growth. Contributing to subscription maintenance and support revenue in the current period was the arrangement with iStudy Limited, Qumu’s sales partner in Japan. iStudy has agreed to pay Qumu $1 million in non-refundable Qumu Cloud license fees to expand the relationship between the companies over the next two years. Gross margin for the second quarter of 2018 was 68.5% compared to 65.6% for the second quarter of 2017. Gross margin for the six months ended June 30, 2018, was 63.7% compared to 63.6% for the six months ended June 30, 2017. The change in gross margin compared to the prior year periods was favorably impacted by increased perpetual license revenue in the quarter. Cash and cash equivalents totaled 5.2 million as of June 30, 2018, compared to $7.7 million as of December 31, 2017, reflecting the 2018 first half operating loss, offset by changes in working capital. Subsequent to June 30, the company received net cash proceeds of $9.6 million on July 6 from the sale of its investment in BriefCam Limited, which was recently acquired by Canon Inc. From the BriefCam net proceeds, the company paid on July 19, 2018, $6 million of principal and $463,000 of accrued interest on its outstanding term loan with ESW Holdings, Inc. As of July 20, 2018, after the receipt of the BriefCam proceeds and prepayment of its outstanding term loan, the company had cash on hand of $7.3 million. 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, total operating expenses decreased 9.3% for the six months ended June 30, 2018. Adjusted EBITDA is trending positively and was $71,000 for the three months ended June 30, 2018, compared to negative adjusted EBITDA of $1 million for the three months ended June 30, 2017. Given the performance to date and sales pipeline, the company is confident in the achievement of our previously issued revenue guidance for the full year 2018. Annual bookings growth is expected to be 25% in 2018, emphasizing growth in sales of the QX platform. Revenue for 2018 is expected to be approximately $25 million, which includes approximately $1.1 million unfavorable revenue impact due to the adoption of the new revenue recognition standard ASC Topic 606 in 2018, as well as the loss of a large customer in the fourth quarter of 2017, representing revenue of approximately $3.2 million annually. Gross margin percentage is expected to be in the mid to high 60s, adjusted EBITDA loss for 2018 is expected to be approximately $3.5 million, which is unchanged from previously issued guidance. The company expects to achieve positive adjusted EBITDA, a non-GAAP measure in the fourth quarter of 2018. Adjusted EBITDA for 2018 excludes the net gain of approximately $5.2 million on the sale of BriefCam Limited and subsequent pay down of the term debt, stock-based compensation expense of approximately $1 million, amortization of acquired intangible assets of approximately $2.1 million, depreciation expense of approximately $500,000, income tax benefit of approximately $200,000 and interest expense of approximately $1.8 million. Net loss for 2018 is expected to be approximately $3.5 million loss, which includes the gain on the sale of our investment in BriefCam Limited in the third quarter of 2018 and results for the six months ended June 30, 2018. With that, I’ll turn it back over to Vern.

[Vern Hanzlik:]

Thanks, Dave. Let me wrap up on a few key points. Q2 was a fantastic quarter and we’re in great shape for the second half of 2018 with a strong balance sheet. Our efforts of rightsizing the organization while advancing and differentiating our QX platform have paid off. Our marketing is driving opportunities into a robust pipeline and sale is closing these opportunities much more efficiently. And the industry opinion leaders are taking note, further amplifying our success. In a nutshell, our plan for success is working. Now let me open up the call for questions.

[Operator:]

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

[Jeff Van Rhee:]

Just a couple of questions for you, guys; first, I guess, just on the bookings side. Well, let me back up. I wanted to touch on the customer churn. I think you commented last quarter you were going out and talking to all your customer base and try to be very proactive and walking them down. You gave the customer churn numbers to date, but can you just talk about what you found when you went out and engage with the customers, and specifically, what’s your feeling on any of the sort of the top five customers, for instance, in terms of churn risk over the next 12 months?

[Vern Hanzlik:]

The churn rates for the stuff that’s behind the firewall, Jeff is minimal to nil. But what we found is our customers really expanding beyond what they already are using the platform for. The one example I used in the call today was people taking our platform to the next level, leveraging up self-service and expanding what they’re doing, and that’s what we’re finding as we’re talking to these customers. It’s education, evangelizing out of the streaming groups, where there’s this consolidation of video conferencing, management and streaming, and they’re all coming together, and then the integration with the other enterprise platforms. So we’re finding a much broader need for this type of digital communication, and that creates the stickiness, and then our networking component, which is our delivery network, really creates the foundation of why people will stay with us long from a longevity perspective.

[Jeff Van Rhee:]

And then on the bookings, just to be clear, on the calculation methodology, so it’s licenses or with respect to the recurring, it’s year one of the recurring in that bookings number?

[Vern Hanzlik:]

That’s correct. So if it’s a SaaS contract, yes if it’s the just annual contract value. And then if it’s perpetual, it’s licensed the first year maintenance and then any professional services to deploy that, that’s our calculation.

[David Ristow:]

Right. We would add appliances to that as well as those are part of that on-premise deployment.

[Jeff Van Rhee:]

And then with respect to iStudy, just maybe back up to that for a second, you talked about, I think, at one point, about 1 million licenses, and I think there was another point in there that there was a 500k. Maybe I missed something, but just help me reconcile those two, and then also along those lines, just tell me more about the partner and in particular what does this prepayment or what does this license deal get down with respect to? I’m assuming it’s a volume of licenses that can go resell. Just help me understand that.

[Vern Hanzlik:]

So let me answer the first one, so the $1 million commitment is just for cloud or SaaS revenue. The second transaction they did that they’ve been working on for a while in conjunction with Fujitsu was just a perpetual deal that’s behind the firewall, and that’s why it was recognized within the quarter, and then what the commitment gives them is, it gives them the extension on their exclusivity in the market, and it maintains their discount level that they have.

[Operator:]

Our next question comes from Steve Vonder Haar of Wainhouse Research. Your line is open.

[Steve Vonder Haar:]

Could you expand a little bit more on the Microsoft integration, if you can, does that include any integration with the Microsoft Stream platform, or just a little more color on how you’re integrating with that universe?

[Vern Hanzlik:]

Hi Steve, at this point, what we’re doing is we’re basically enabling Skype for Business desktops to deliver off our network minus stream. We are working on some things that potentially would integrate with stream, but at this point it’s Outlook integration and Skype for Business integration, so they can just use that desktop for streaming.

[Operator:]

[Operator Instructions]. I would now like to turn the call back over to Vern Hanslick, President and CEO for final remarks.

[Vern Hanzlik:]

I want to thank everybody for attending today, and if you have any questions, let us know. Other than that, have a great day.

[Operator:]

Ladies and gentlemen, thank you for your participation in today’s conference. You may disconnect. Have a wonderful day.