Qumu Corporation
Q3 2018 Earnings Call Transcript

Published: 1 Nov 2018

[Operator:]

Good day. ladies and gentlemen, and welcome to the Qumu's Third Quarter 2018 Conference Call. [Operator Instructions] As a reminder, this conference may be recorded. I would like to turn the conference over to your CFO, David Ristow, Please, the floor is yours.

[David Ristow:]

Thank you, George. Good morning everyone, and thank you for joining our third 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. First, I'd like to touch on some key financial highlights and then I'll review our progress against our strategic plan. I'm happy to report Qumu ended its third quarter positive, both positive net income of $2.4 million and earnings per share of $0.25, marking the company's first quarter deposit net income and EPS since Q3 of 2014. The net income was largely a result of the $6.5 million gain on the sale of our investment in BriefCam, Ltd which strengthened Qumu's balance sheet to $8.5 million in cash, an increase of $3.3 million over the previous quarter after paying down $6 million or 60 % of our long-term debt. Revenues were $5.7 million for the quarter compared to $7.6 million in third quarter. Adjusted EBITDA was a negative $803,000 and gross margins were 63%. In addition Qumu's annualized reoccurring revenue is approximately $16.5 million for 2018 which is comprised of 44% SaaS revenue and 56% annualized support and maintenance revenue. We expect a degree of lumpiness in our business given our long sales cycles and our transition from perpetual contracts to software to service. And for that reason we are focused on our annual guidance. With this in mind based on number one the strength of our sales pipeline, number two the growing level of our customer base. An estimated year-over-year growth of annualized bookings of 20% to 25%, we are reiterating our guidance for the year of approximately $25 million in revenue. Given our strength in a balance sheet year-over-year bookings, prudent expense management we remain bullish on our business. Now I'd like to take a moment to review several ways Qumu is building a strong momentum through the balance of 2018 and into 2019. We are seeing continued growth in our customer opportunities and our pipeline remains strong at 2.5x projected sales. We have already closed several deals this quarter. Qumu's customer renewal rate continues to grow rising 1% during the quarter to 90.5%. This indicates that continuing we are earning the trust and commitment of the world's leading organizations. During the quarter, we expanded our footprint in 22 customers beyond our renewal activity. We are continuing expand our reach with a leveraged sales model, steadily building strong channel relationships with British Telecom, AT&T, Panaka, Zhang Tegra, Genesis and Whitlock. I'd also like to take a moment to highlight another positive trend in our business, which is a growing number of hybrid deployments being requested new and existing customers. Until recently hybrid enterprises video implementation were seen as a transition point between prompt on premise deployments and full cloud environments. This recent surge in hybrid activity proves that we are not only understanding the enterprise video market today, but also where it is headed. Hybrid is the strategy destination for many of our customers. Ultimately these customers are choosing Qumu's pathfinder intelligent delivery technology because pathfinder is a major component that brings distributed computing to the enterprise making video delivery reliable, manageable and scalable. For example, our partner Whitlock brought a major computing technical technology client who is migrating a large on-prem installation to hybrid, putting their full confidence in pathfinder as their delivery technology. In addition another customer major financial services firm is migrating from cloud to hybrid, again using Pathfinder as the bonding element and providing peer-to-peer delivery technology across hundreds of branch offices. Now I'd like to report on the progress against each of our four pillars and our strategic plan. Our first pillar is sales execution and new customer growth. Qumu's marketing team is highly skilled in bringing qualified leads into our pipeline by creating engaged content, a steadily building on our brand visibility. This year. we've made had tremendous success securing top rankings with industry influencers and analysts, who have ranked Qumu as an industry leader. Exciting product innovation, customer experience, ability to execute and completeness of vision, the key factors in their analysis. Between these analysts honors, our marketing leading list of global 2,000 customers is becoming clear to the entire industry that Qumu's absolutely belongs on the list of the best-in-class Enterprise video solutions. In addition to our analyst honors, we also continue to be recognized in the industry as whole receiving Awards of 2018 for our WebRTC technology or bring your own device support or our employee onboarding solution. And recently, we are named as one of the 50 companies that matters the most in online video in 2018 by Streaming Media Magazine. Attendance of our new live webcasting series called the video visionary series has also been growing steadily. This serie is not only a showcase of our experts in their knowledge, but also demonstrates our product Qumu Cloud in action. The most recent educational webcast we've delivered has included choosing the best video distribution technology for your environment. Five simple steps to creating high quality video, business video and video capturing using artificial intelligence. These new programs help Qumu build a robust pipeline and sales opportunities and now are focused on driving those opportunities to close and improving our ability to predict sales. To ensure that we are aggressively pursuing every possible opportunity we're investing in additional sales talent in all regions. Our sales team closed significant deals during the quarter adding to our stellar customer roster. A couple of examples of new customers are Princess máxima, Amica Mutual Insurance; customer expansions included Medeco, Kaiser Permanente, Credit Suisse and Bohringer Pharmaceutical. Qumu is also continued to expand its ecosystem and resellers resulting in a record year of growth in Qumu's Channel Partner Network. This past quarter, we announced a new strategic partner agreement with avi SPL Systems. Genus Networks and Whitlock. These relationships extend our leadership position both unified communications and hybrid cloud and Whitlock relationship has already yielded a large technology client mentioned earlier. In addition, key partners such as AT&T, PepsiCo, BQ / I Study are keeping deeper, making deeper commitments and working directly with us on lead generation. V-cube I study for continues to help us grow our customer footprint in Japan. The second pillar in 2018 strategies customer success and retention. I've already mentioned our performance in this area of 90% customer retention. This is due to part of our reorganization of our sales team earlier this year in which we assigned account managers to all accounts, enhancing our retention and expansion in our customer base. The third pillar in our strategy is product, market focused product innovation. During the quarter, we made multiple product improvements in two key areas, building on two of our competitive strengths video delivery and extensibility. Our intelligent video delivery software pathfinder is our secret sauce providing comprehensive and flexible connectivity inside or outside the firewall. Because our customers' environments are highly complex Pathfinder offers multiple delivery capabilities including peer-to-peer third-party content delivery networks or CDMS. And we recently announced a release of our HTML 5 multicast extension for our enterprise solutions. Our open platform unique extensibility allows our partners to develop integrations and extensions for our platform as well. For example, we just released integration with caption huddle, industry-leading video capturing technology. This integration allows Qumu customers to automate the process of creating highly accurate captions at broadcast quality in over 50 languages, generating captions is a gating factor company becoming able to publish videos across the enterprise. And for our customers that mean significant competitive advantage giving them ability to instantly share knowledge across the enterprise and excel their global speed to market. Our fourth pillar is strengthening our financials. As I mentioned earlier, our balancing is significant stronger now with less debt and improved cash position. We also continue to improve the optics into our operational expense where we're $5.2 million for the quarter, a decrease of $1.3 million for Q3 of 2017. We have not only improved our systems and our processes, but our finance team collaborates directly with our commercial team on a daily basis to initiate new contracts, streamline customer renewals and result in improved cash flow. Now over to Dave for further financial commentary.

[David Ristow:]

Thank you Vern. As noted earlier, we ended our third quarter with a positive net income of $2.4 million and positive earnings per share of $0.25. These results included the $6.5 million gain on the previously announced sale of our investment in BriefCam, Ltd reflected improved operating efficiencies resulting from our ongoing cost reduction initiatives. On a year-to-date basis, our operating loss decreased by $1 million and $2.8 million in lower revenues evidencing that our ongoing cost reduction and operational improvement efforts are working. We finished the quarter with $8.5 million in cash, an increase of $3.3 million over last quarter. This is following the receipt of $9.6 million of net proceeds from the sale of our BriefCam investment from which we paid $6.5 million to pay down our long-term debt and interest payable. Third quarter 2018 revenue was $5.7 million compared to $7.6 million in the third quarter of 2017. Qumu's annualized recurring revenue is approximately $16.5 million which is comprised of 44% SaaS revenue and 56% annualized maintenance revenue. On $1.9 million less revenues, gross margin for the third quarter of 2018 was 62.6% compared to 61.6% for the third quarter of 2017. Gross margin for the nine months ended September 30th, 2018 was 63.4% compared to 62.8% for the nine months ended September 30th, 2017. Operating expenses decreased $1.3 million and $2.6 million during the three and nine months ended September 30th, 2018 respectively, compared to the 2017 periods reflecting the impact of our cost reduction initiatives during 2018. Fr guidance, given the performance to date and sales pipeline, we remain confident in our achievement of our previously issued revenue guidance for the full year 2018. Annual bookings growth is expected to be 20% to 25% in 2018 emphasizing growth in sales of the QX platform. Revenue for 2018 is expected to be approximately $25 million which includes an approximately $1.1 million unfavorable revenue impact due to the adoption of the new revenue recognition standard ASC 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 for 2018 is expected to be a loss of approximately $3.5 million which is unchanged from previously issued guidance. The company expects to achieve positive adjusted EBITDA and non-GAAP measure in the fourth quarter of 2018. Adjusted EBITDA for 2018 excludes other income and expense of $5.3 million reflecting the sale of BriefCam, a pay down of our term debt in the third quarter of 2018, the change in the fair value of the warrant liability and net losses from foreign currency transactions, as well as stock based compensation expense of approximately $1.1 million, amortization of acquired intangible assets of approximately $2.1 million. Depreciation expense of approximately $0.5 million, income tax expense of approximately $300,000 and interest expense of approximately $1.8 million. Net loss for 2018 is expected to be approximately $4 million which includes the results from our nine months ended September 30th, 2018. With that I'll turn it back over to Vern.

[Vern Hanzlik:]

Thanks Dave. Let me wrap up on a few key points. We are bullish on the business and reiterate our confidence as we finish 2018 and we look to 2019. Qumu ended our Q3 with a positive net income and earnings per share, and a very strong balance sheet. Our pipeline and deal activity are robust. We continue to earn top rankings from industry analysts and our QX strategy is taking hold with new and existing customers. Now let's open the call up for questions.

[Operator:]

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

[Jeff Van Rhee:]

Great, thanks guys. Thanks for taking my questions. So just a few for me. I guess I start with bookings. As the guide is 20 to 25 here just to be clear I think last quarter you had said 25 and in the press release you said 25, but you said the guidance was unchanged. So maybe it's splitting hairs but it had been 25 now it's 20 to 25 just, am I seeing that right?

[Vern Hanzlik:]

Yes, you're seeing it right, Jeff. It's just-- the guidance is the same and we just --the book, the annualized bookings vary depending on whether it's SaaS or perpetual and how we can recognize the revenue for the year. So it's just a range for that.

[Jeff Van Rhee:]

Okay so that rather than being 25 now being 20 to 25 is to account for a change in the split I would think that wouldn't change bookings. Is that the change in the splits between prem and cloud that you're trying to account for with that change?

[Vern Hanzlik:]

Yes, that's correct.

[Jeff Van Rhee:]

Okay and what were bookings for the quarter?

[Vern Hanzlik:]

For this quarter?

[Jeff Van Rhee:]

Yes.

[Vern Hanzlik:]

It was about $1.5 million.

[Jeff Van Rhee:]

Okay, got it and then on the S&M side I think you talked about expectations of, I think as you put it maybe adding some resources. I'm not, what those weren't the exact words but putting more resources in place I guess just to expand on that a bit.

[Vern Hanzlik:]

What we're out looking in a couple areas, Jeff, both on the biz debt side but also on just regional people that we have that work with partners and are spread around the US. And then also potentially in EMEA.

[Jeff Van Rhee:]

Okay. So we're likely over the next three, six months here we're going to be adding, can you get any sense of magnitude how much, how many more resources or percent expansion in sales headcount? Any quantification on how much you're going to put in place?

[Vern Hanzlik:]

Not-- as we're looking at 2019, it's really, as we bring on some new partners, its how much support we have to have to support them. So the quantity will be less as the types of people but I mean there'll be more of a leverage model. So as we bring on bigger partners that we're leveraging that. I mentioned some of them that we're talking to. They're kind of getting to the next level. So it will be support of that. We don't, I think that we're looking at potentially some regional people that are direct that are handing some of the bigger accounts as we expand because our account managers are very busy right now with our base. And expanding that basis we saw we get 22 people expands their footprints just in Q3.

[Jeff Van Rhee:]

And on the S&M, Dave, the $1.8 million for S&M in the quarter is that a good, I mean obvious that it might grow modestly because of incremental heads, but is that a good baseline number to work off of as we look out into Q4 in 2019?

[David Ristow:]

When you're speaking to the expense run rate?

[Jeff Van Rhee:]

Right, the 1.8 million of S&M in the quarter.

[Vern Hanzlik:]

Yes. So from the perspective, first point, I mean what we're driving for is really enhancing that direct sales team, as well as taking advantage of the partnership efforts that we've made this year. So I would expect essentially sales and marketing to increase a bit as we move forward, but it's going to be tied directly to, not only what we're able to achieve in the hiring plans, timing and then additionally what we're ramping for in terms of expectations for 2019.

[Jeff Van Rhee:]

Got it and then obviously you didn't comment in any formal way yet on 2019. Can you give any, at least preliminary thoughts based on sort of the sales structure put in place and the current pipeline in momentum? You've given this 20 to 25 range for bookings this year. Any crude even wide range of thoughts what with respect bookings or revenue growth as we look in to 2019?

[Vern Hanzlik:]

I think the way we'll --we're going to guide it, Jeff, is more on the bookings because it's the mix and how it affects revenue. So we're in our planning right now for 2019, but I would say that you can see something similar with bookings, annualized bookings because that's really how we're determining our organic growth. So I would say it would be there and then how that rolls up into because we are seeing more as I mentioned more hybrid and more SaaS. Our SaaS numbers are continuing to grow, so that will affect the top-line growth but I mean it'll affect our, as far as benchmarking, yes, it would be more around the bookings growth.

[Operator:]

Our next question comes from the line of Glenn Mattson with Ladenburg Thalmann. Your line is now open.

[Glenn Mattson:]

Hey, guys, thanks for taking the question. Just curious on the visibility into Q. I know the license and appliance flying could be lumpy from time to time. Is there chance you see what kind of like a Q4surge because of the, maybe there's some budget flush situation or is it, just how do you frame the outlook just for that next quarter out and your confidence level and the visibility and that --in that outlook for 2018?

[Vern Hanzlik:]

Yes. I mean I think that we feel confident of that, Glenn. I think the lumpiness as you mentioned, we had some deals that slid into --that slid out of Q3 that were, I wouldn't say significant but they were kind of where you guys said we're looking at us from a quarterly perspective. So we got a lot of confidence of where we'll be and we'll see some year-end spending with our customer base in particular. So and our conference level is pretty high as we said just kind of reiterating where our guidance is. So and I think that it depends on budgets and timing. But we just --we continue to see Q as end of the year for our large enterprises. They continue to look to see where they going to spend their year-end money depending on expansion. And we're starting to see that with, as we mentioned with our QX stuff. We get a broader footprint, our customers are using the product more so there's more demand,

[Glenn Mattson:]

Okay, thanks. And maybe could you just expand a little bit on the-- there's so many active partnerships now. How do you channel resources to the ones that are --have the most opportunity or the most potential in the medium term and there's some big ones in there like you mentioned British Telecom recently. Can you talk about how that's progressing and just a little more detail as to how that channel can potentially surprise to the upside perhaps over the next 24 months or whatever?

[Vern Hanzlik:]

Yes. I think the key for us is that we, the funnel are we're trying to keep it narrow on the BT side to really be able to invest with what we're spending and if we need to add to that as we've mentioned. So I mean the British Telecom relationship continues to strengthen and they're looking to us to provide services for them. And they've-- we've got an active pipeline with them. But the other ones that we mentioned on there also are very active. And we're trying to keep it narrower. So it's less than ten of people that less these partners that really monetize our growth as we look to 2019 because these are all impactful partnerships for 2019 not as much for the 2018 guidance, but I think that we're just putting the right amount of energy into that in order to make sure that they're enabled, well communicated in how we can drive the opportunities they're bringing to us. So it's a narrower focus, Glenn. I think that's really what you're looking for. We're not going to be broad brush. We will have companies that will, if you look at the model that we've done with V-cube and I Study, they built markets on top of our platforms. We see some of those things e-mart emerging in 2019 as we create more extensibility for the platform, but those are areas that we can do with our cloud product more effectively. And I think that people can build services on top of that. And that's where we see a big opportunity as we get into 2019.

[Operator:]

Thank you. And I show no further questions at this time. I would like to turn the call back over to President and CEO, Vern Hanzlik for closing remarks.

[Vern Hanzlik:]

Thank you and thanks for joining us today. And have a great rest of your day.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. And you may all disconnect. Everyone have a great day.