Qumu Corporation
Q4 2018 Earnings Call Transcript

Published: 6 Mar 2019

[Operator:]

Good day, ladies and gentlemen. And welcome to the Qumu Fourth Quarter 2018 Conference Call. [Operator Instructions] I would now like to introduce your host for today's conference, Dave Ristow, Chief Financial Officer. Please go ahead.

[David Ristow:]

Good morning everybody, and thank you for joining us for the fourth quarter and full year 2018 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 number of risks and uncertainties that could cause actual results to differ materially. Please note 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 detailed description of risk factors that may affect our results. These documents are available on our website qumu.com and 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 which is posted to our website. You will find additional disclosures regarding these non-GAAP and adjusted EBITDA measures including reconciliation of these measures with comparable GAAP measures. And with that I'll 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 am happy to report milestone fourth quarter for 2018 marking two quarters of positive adjusted EBITDA and two consecutive quarters of positive basic earnings per share. Revenue for the quarter was $6.9 million and annual contract value bookings grew to $5.8 million. The solid second half of the year contributed to a strong finish for 2018 and places Qumu in a great position for 2019. For the fiscal year 2018, Qumu met all guidance targets for bookings growth, revenue, gross margin and adjusted EBITDA. ACV bookings grew 21.3% to $14.1 million reflecting our momentum as we transition the company to recurring revenue model. Revenue for the year was $25 million with gross margins at 66%. Our cash position remains strong at $8.6 million. In addition, I am extremely happy to report customer retention is at 91%; our highest mark ever. Our strategy and investment and innovation are paying off, enabling us to capitalize on global video trends and lead clients. We've achieved 2018 financial guidance. We have right sized our cost structure and optimized operations. Our sales pipeline is strong; our channel program is contributing to our top and bottom lines and continuing to grow. Our adjustable market is expanding in the top analyst firm and enterprise video all ranked Qumu as an industry leader. Dave will outline our guidance for 2019 but let me say this is the most exciting and satisfied period I've experienced since I joined Kumu in 2012. We are now realizing the benefit of transforming the business on multiple levels. Strategy, operations and technology. Even while we pivoted the business to a recurring revenue model, we simultaneously invested in and transformed our product. As a recent announcement just last month, we launched our new intelligent video platform that helps companies create video ware networks. This highly nimble platform plus our years of experience in the enterprise are opening up new opportunities with large customers, new partners, some in new markets. Let me highlight three customer examples that demonstrate the mix of deployments Qumu was able to serve. First, we continue to win large enterprise opportunities that heavily regulated secured conscious organizations. Qumu recently acquired yet another major financial institution as a customer and the implementation is already underway. This major on-premise deployment for an enterprise wide communications includes thousands of virtual desktop users. Our ability to serve high-quality video to the financial service user base is one of the key reasons we're able to unseat a heavily entrenched incumbents competitor. Second, last quarter we landed a San Francisco-based bank as a new customer and they are deploying our hybrid video solution as we speak. I spoke a lot about hybrid configurations in the past. These are cloud centric deployments that run our intelligent pathfinder delivery software along with edge computing technology. Our hybrid customers benefit from the flexibility of cloud environment, combined with the security and performance of an on-prem implementation. And this new customer is no exception. Third, a number of our existing on-premise customers are transitioning to hybrid configurations, which often involves expansion of the account as well. Last quarter, I mentioned our partner Whitlock brought Qumu a major computer technology client is migrating from its large on-premises installation to hybrid. The customer already is expanding from $100,000 per year maintenance fee to an annual SaaS license of a $0.5 million representing a $400,000 increase in annual contract value. Our video wear platform helps companies position for the future no matter where they are in their evolution towards distributed computing or a video first communications. Now I'd like to report on the progress against our four pillars of our strategic plan. First, our pillar of sales execution and new customer growth. Qumu's marketing team continues to deliver qualified leads into our growing sales pipeline, which remains consistently strong at more than 3.5x revenue coverage for 2019. During 2018, Google was featured in 31 published articles and received 18-8 industry awards, most notably being named industry leader by Gartner, Aragon Research and Frost and Sullivan. I would also like to call special attention to an honor Qumu recently received very early in 2019. When one of the leading analyst firms in the country named Qumu as a new contender in an annual research globe for video web and video conferencing. Although this space has been traditionally dominated by firms like Cisco, Microsoft, Zoom, Google and Adobe. Qumu's first time inclusion space as a contender not only highlights the intimate collision of video streaming and video conferencing, but also significantly increases Qumu's total addressable market for 2019 and beyond. I'm especially happy to say that our focus on improving sales execution is paying off. This is a direct result of Qumu's investment in top management, sales talent by simultaneously reorganizing and refocusing our sales team, process sales team and processes over the past year. We have a sales organization and understand the industry, focus on high level of customer service and know how to sell the next generation of our solutions. Customer confidence is strong and growing as clients are seeing the benefit of Qumu's guidance and service. And having a world-class roster of satisfied customers helps us win outstanding new customers like AmeriHealth, Fulton Financial and Amica Insurance who represent just a few of our total of 30 new enterprise customers within our defined market for 2018. 2018 was also a big year for Qumu in terms of monetizing our partner ecosystem and expanding our channel efforts. Revenue from key partners like AVI-SPL, iStudy, Whitlock represent over $6.3 million or 25% of our 2018 revenue and 35% of our ACV bookings. And of course in December, Qumu dynamically increased our channel reach when we were selected by British Telecom as the company's strategic enterprise video - company strategic enterprise video streaming vendor for its worldwide customer base. Not only it has BT services agreed to resell Qumu streaming solution to existing global customers which span more than 180 countries. The company will also use Qumu Cloud as a managed streaming service for its voice and video conferencing customers who are looking for an easy subscription service for live and on-demand video events. The monetization of this partnership is well underway with sales pipeline training, marketing, support programs in place. A key technical integration between Qumu's platform and other video technology provider will ensure a seamless, end-to-end solution for BT and its customers. Finally, we began a new partnership with a leading integrator in the Middle East which immediately expands our opportunity in that region. In fact, thanks to the new partnership we just closed a major implementation of one of the largest companies in Saudi Arabia. The second pillar of our strategy is customer success and retention. I've already mentioned the 91% retention. Our reorganization of the sales team last year around our customer centric account management program enhanced retention and expansion in our customer base. And a key effort was actively helping clients moved to the distributive computing. During the fourth quarter six deals involving customer transition to hybrid which have grown from 8% to 13% of our deployments. Notably customer expansions include Toyota Motors, AT&T and Dow Chemical. The third pillar of our strategy focuses product innovation. In 2018, Qumu reorganized product development under one leader, a single consistent development methodology streamlining and accelerating our pace of product improvements and enhancements. These product enhancements plus key partner integrations culminated a recent announcement of our Qumu's next-generation enterprise video technology platform as I mentioned earlier. This new platform dynamically manages and optimizes all inbound and outbound corporate video streams, creating the first true video ware network for the enterprise. Our new platform addresses two major trends going in the enterprise. Distributed computing and self-service. Distributed computing meaning putting compute power where and when it is needed most. Our intelligent video ware network handles highly dynamic demands of video across the enterprise and distributes video processing primarily through software along with instantly sensing the network's health. Self-service reference a company enabling leaders and employees to launch webcast and create new video assets from any device. Essentially, we are making video a natural extension how people already work and communicate today. A great example is one of our major customers and leading automotive manufacturer because our platform intelligently adjusts to the inbound video streams. The leaders can launch webcast and record meetings from an existing video conferencing system and in powerful new capabilities to the tool already known and used. The fourth pillar and final pillar strengthening our financials. I've already highlighted the key financial accomplishments. I would like to underscore the tremendous work our financial team has done to streamline operations, drive significant cost reductions by collaborating and working with our teams across all areas of the business. Is not only a part - it not only has put us in a solid position with our balance sheet, but it also has put us in a great position as we grow the top line. Now over to Dave for further financial commentary.

[David Ristow:]

Thank you, Vern. We made significant improvements this year against all four of our strategic pillars, and I will comment on a few additional items related to our financial results and provide guidance for 2019. Year-over-year our operating loss improved by $2 million and $3.2 million less revenue. This is our second quarter of positive adjusted EBITDA and as we committed, we met or exceeded all 2018 financial guidance for bookings growth, revenue, and gross margin and adjusted EBITDA. We ended our fourth quarter with net income of $48,000, adjusted EBITDA of $130,000 and annual contract value bookings growth of 21.3%. Total revenue was $6.9 million for the fourth quarter compared to $5.6 million last quarter. Software license and appliance revenue was $1.5 million for the fourth quarter compared to $985,000 last quarter with the increase primarily due to increased software license sales. Subscription, maintenance and support revenue was $4.8 million for the fourth quarter compared to $4.1 million last quarter. Most of the increase in the fourth quarter was due to the timing of revenue for term software licenses under the new revenue guidance adopted in 2018. Professional services and other revenue was $511,000 for the fourth quarter compared to $577,000 last quarter reflecting fewer billable days due to holiday seasonality. Subscription, maintenance and support revenue will grow steadily from our annual recurring revenue base of approximately $17.1 million at the end of 2018. Gross margin was 73% for the fourth quarter compared to 63% last quarter. Gross margin for the year ended 2018 was 66%, an improvement of 2% year-over-year. Moving on to operating expenses and adjusted EBITDA and non-GAAP measure. We continue to focus on improving operating results and achieving sustainable positive adjusted EBITDA compared to the corresponding periods in 2017, total operating expenses decrease 11.3% and 12.5% for the 3 and 12 months ended December 31st, 2018 respectively. Adjusted EBITDA improved $935,000 for the three months ended December 31st, 2018 and improved $1.2 million for the year ended December 31st, 2018. Moving on to the balance sheet. Cash and investments were $8.6 million as of December 31st, 2018 compared to $7.7 million as of December 31st, 2017. And the company had aggregate positive working capital of $865,000 up $2.3 million from negative working capital of $1.5million at December 31st, 2017. Moving to guidance. The company is issuing the following financial guidance for the full year 2019. Annual contract value bookings are expected to be to 20% to 25% in 2019 compared to 2018. Revenue for 2019 is expected to be approximately $27 million. Gross margin percentage is expected to be in the high 60s to low 70s. Our adjusted EBITDA loss for 2019 is expected to be approximately $1.5 million. Forecasted adjusted EBITDA for 2019 excludes interest expense of approximately $1 million, income tax benefit of approximately $200,000. Depreciation expense of approximately $300,000; amortization of acquired intangibles of approximately $1.2 million. Stock based compensation of approximately $900,000 and an increase in a warrant liability of approximately $400,000. Net loss for 2019 is expected to be approximately $5.1 million. In summary, we delivered all 2019 financial guidance and will continue to invest for the future through enhancements to our industry-leading solutions. We will be working hard for our shareholders to deliver continued success in 2019. With that now back to Vern.

[Vern Hanzlik:]

Thanks Dave. We appreciate everybody's patience during the transition of Qumu's business which we've accomplished on multiple levels in terms of operation, execution and organic growth. 2018 was a key year of transition for Qumu on multiple measures including achieving across the board leadership rankings among top analysts covering our industry. Completing two quarters of positive adjusted EBITDA and two consecutive quarters positive basic EPS. Monetizing our channel to contribute 25% revenue and 35% of annual contract value and building customer retention to 91%. As we move forward into 2019, we have a high degree of confidence in our optics and into our sales pipeline for the first half of the year. We are also confident in our ability to sustain our momentum towards achieving positive adjusted EBITDA during the second half of the year. With this outstanding momentum, our focus going forward is to aggressively evangelize our new intelligent video platform so that we can seize the market opportunity presented by our technology leadership. Continue to grow and monetize our channel relationships especially with BT as that new partnership comes online. Build on the momentum we've achieved with our financial results. Remain laser focused on solving tough problems of video in the enterprise. Now let's open the call up for questions.

[Operator:]

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

[Jeff Van Rhee:]

Can you hear me guys? So, yes, thanks guys. So a couple questions for me. I guess first is you look at BT, .talk to me about the potential in the timing there. I mean obviously a big distribution channel. Just give us a sense of kind of what kind of mine share you feel like you have there and what are reasonable expectations from that in terms of a percent of bookings for the year.

[Vern Hanzlik:]

I think well mine share with inside of BT is very, very high. I think that we're doing a lot of the things that I mentioned just in my script, Jeff, as far as the enablement piece. We've got technology experts that understand the platform. We're doing integrations with their video conferencing offerings. We've got our portal that we so as we come into Q2 and Q3 this thing will kick off and start to generate opportunities for us and will monetize some of that. I think from a bookings perspective this is north of seven figures for us. We were trying to be a little mindful of pace that this grows. Our realistic expectations that second half of this year will influence the business and as we move into 2020, there will be significantly more as we grow. But there's a lot of energy and we're cautiously optimistic of the pace just based on the activity that we're seeing from the product teams, the people, the technical teams that support this and then also the sales teams that are out around the world. So it's an exciting relationship. And we're just seeing different characteristics that make it more valuable for us.

[Jeff Van Rhee:]

Got it. On the sales and sales motion. Can you take a minute and talk about how that process has changed? I think you outlined how you've much more satisfied with the way you're executing. And can you talk about it in the context of two specifics? How has your execution changed with respect to deal identification getting in deals so you're considered? And then secondly, just talk about win rates and who you're seeing most often.

[Vern Hanzlik:]

Well, I mean the thing is we've created a couple of different swim lanes. One is the account management group is basically working strategically with all our major customers. So our top 50 customers were hand-holding and expanding and that's working quite well. We have people that are dedicated to that. So that's just continuing to mine our premier customers that we have that are expanding as we expand the capabilities of where our platform is. So that works well and that will continue to grow in 2019. The hunting piece of our formula is I think the messaging that we have in our digital marketing group, AmeriHealth, the Fulton Financial, ones that I identified those were things that came in this year. We're winning a high percentage of those, Jeff, above 90% when we're in a PLC and we're able to articulate where we're going from maybe an on-premise to a hybrid and we can articulate that or expand that. So I think that we're --when we get to a PLC, the win rates are above 90%. The competitive landscape is the normal suspects that we see within the Magic Quadrant in the --where we're it's a live broadcast versus VOD. If it's hybrid where we think we're best-in-class on that from a distribution of how we work. So I think that we're just seeing more opportunities coming to the pipe. We're well qualifying those from a procedural perspective. I think that's the most important thing. So when we scrub our pipelines, we go through the --is this a real opportunity? Where are we with the evolution of it? Are they-- is it a commodity type thing? That's low in that from a land expand, we'll go after those. But we won't chase them into the lower level because we want to really sell the value and that's where we'll collect limited customers, but high value and they'll be expanding. And so that seems to be working quite well for us. And as we get into more opportunities with some of these other partners that we mentioned that seems to resonate with them. And as they get success they bring more opportunities to us. So we're going to continue at that pace.

[Jeff Van Rhee:]

Okay and one last for me then with respect to the, I guess the gross bookings as opposed to the ACV just talk about the percent sort of characterizing 2018 and then what's in the pipe going forward? The percent that of those bookings that are from new versus existing customers. And I'm also interested in the splits from prem hybrid and cloud just how did that end up for 2018? How does it look for 2019?

[Vern Hanzlik:]

Well, I think that our largest growing area is hybrid. So but I think that our Japanese partner continues to bring a significant amount of cloud opportunities to us with their corporate education, a vertical that they're in. So those are again smaller deals but more customers. So we're over 50% just pure SaaS cloud .We're 13% hybrid and the balance is on-premise. I think from a net new this year it's going to be more hybrid and cloud and we don't have the delineation. I would say it it's going to be 40%. These are new customers, 40% cloud and then probably will be in the 20% of hybrid, and then we'll have the balance of some on prem, but I think that those are highly regulated and we still people see people investing in that. So we're going to break that down a little bit more year-over-year as we get through Q1 here, but we'll continue to report that, Jeff. I mean right now it's a --there is a movement on hybrid. You saw it grow about 5% --from a year-over-year perspective on hybrid. And that's continuing to feed into our pipe.

[Jeff Van Rhee:]

Got it. And then just one last I guess on the pipe. Anything else that jumps out at you at this point about what would actually-- we talked about those splits, but at a higher level and you look at the pipe now versus six months ago say what are --what are the other notable differences during that time?

[Vern Hanzlik:]

The notable is it that we're seeing that the video platforms are becoming mission-critical. The video conferencing merger that I've been talking about probably for a couple years now is a reality, and we're seeing lots of opportunities where people want to do that not just BT but our clients. And I think that we're seeing hybrid as a more front and center where people want to --they want to do a cloud, it's security and they're vetting those things out and if they can't vet it they'll go on premise, but we're also giving them the eye to the future if they want to transition two years down the road they'll be able to do that. So that is definitely a conversation that we're in with a lot of the people that are in the pipeline. So they like the holistic strategy on the inbound side where we're starting to message. We're starting to message our intelligent platform and that is resonating. So articulating that more and more and will define that and have more news out that in May when we have a couple of summits with all our customers both here in the US and in EMEA. But those are areas that we're seeing resonate with customers and there's just a higher level of intensity on the platform and a video first thinking for these bigger corporations.

[Operator:]

Our next question comes from the line of Tom Magni who is a private investor. Your line is now open.

[Unidentified Analyst:]

Good morning, gentlemen. Congratulations on a great quarter. My question is in regard to the annual recurring revenue which ended the year at $17.1 million. Where do you think you could see that at the end of this year of 2019? And if business continues to build as it sounds like it is, what kind of a number could we possibly see going out like in 2020?

[David Ristow:]

So ,Tom , from a guidance perspective we don't actually guide on that particular number. What I can share with you just for context is the fact that we do anticipate that it will be growing. It's a combination of part of this retention as we've been continually focusing on reducing churn with our account management strategies. And through this process of moving to that recurring revenue model and moving folks over to hybrid and increasing the total annual recurring value of those. We're anticipating growth through 2019 and beyond.

[Vern Hanzlik:]

Yes. I think the key I mentioned one of my examples, Tom, we went from a $100,000 of maintenance and then we grew that about $400,000. And to my point a little bit earlier on hybrid those are larger, a little bit earlier on hybrid, those are larger deals for us and we're getting --those are things that are in our pipelines. So that number will definitely grow from the 2017, but as we get better optics on that we'll probably communicate it where we think it will be. But we definitely see growth in that area.

[Operator:]

Thank you. We have no further questions at this time. I would now like to turn the call back to Vern Hanzlik, President and CEO for any further remarks.

[Vern Hanzlik:]

Well, I want to thank everybody for joining today. Have a great day. And we'll talk to you next quarter.

[Operator:]

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