Qumu Corporation
Q1 2017 Earnings Call Transcript

Published: 6 May 2017

[Operator:]

Good day, ladies and gentlemen. And welcome to the Qumu Corporation First Quarter 2017 Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] I would like to introduce your host for today’s conference, Mr. Peter Goepfrich, CFO. Sir, you may begin.

[Peter Goepfrich:]

Thank you, Britney. Good morning. And thank you for joining our first quarter 2017 earnings conference call. With me today is Vern Hanzlik, President and CEO of Qumu. Our comments today may include forward-looking statements relating 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 risk and uncertainties that could cause actual results to differ materially from those described in forward-looking statements. Risk and uncertainties associated with our business are described in our most recent annual report on Form 10-K and any subsequently filed periodic reports on Form 10-Q. 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 the features that are currently available. We assume no obligation to and do not intend to update any forward-looking statements. I now turn the call over to Vern.

[Vern Hanzlik:]

Thank you, Peter. Good morning. I’d like to make a few comments before Peter reviews the numbers. Qumu’s first quarter 2017 was a solid start to the year and we continue to take a long-term view of our dynamic industry. We are successfully transitioning Qumu to a higher margin, more predictable software as a service model and we are doing so while serving large organizations globally with both on-prem and cloud solutions. At the same time, we’re investing in our future with an exciting new development about our suite of solutions that we’re announcing later this month and we have validated our strategy is in step with the market direction towards highly collaborative video environments. The digital workforce thrives on video and enterprise level clients need solutions both encourage and manage that demand at enterprise scale. Let me touch on a few financial highlights. During the quarter we lost $1.9 million of adjusted EBITDA was within the guidance. Revenue fell short of guidance by 5% due to late closing two large deals representing nearly $1.8 million in bookings. Both of those deals closed in the first week of the second quarter. One of those was a mid six figure on-premise deal, which we have taken in the first quarter. And the other was a subscription deal worth approximately $1.32 million Gross margins for the first quarter improved year-over-year, up from 56% to 61% and last, we ended the quarter with a cash position of $10.4 million. With our sights set on large enterprises, Qumu added nine new customers during the quarter, including a significant six figure deal with British Telecom. This puts us on place with our objective of 50 new enterprise customers during 2017, given that the second half of the year is typically strong order and new customer acquisition. As for our existing customers, we continue to see high renewal rates greater than 90% for the quarter and our customer satisfaction scores remain in the high 90s due to our continued focus on quality, product and service. In the Americas and EMEA markets of the nine new customers I mentioned, three were on-premise sales and six were cloud deals of the new customers. They were also predominantly blue chip companies, meaning our land-and-expand strategy is taking hold. One company plans to implement a hybrid cloud and an on-prem solution. This is as much an endorsement of our enterprise expertise as it is our technology platform. Serving the customers well pays dividends in the long run in the form of true partnership and sustained loyalty. In Asia-Pac, we are seeing a momentum build with our Japanese-based partner, V-cube. Asia-Pac represented 5% of our revenue for the quarter, compared to 2% for the fourth quarter in 2016. I’m excited that V-cube is further -- furthering our commitment to Qumu by expanding our own product offering with the Qumu Cloud. Our sales pipeline remains strong approximately 2.5 times. During the quarter, we closed 60% of the 75 opportunities that we were tracking for the quarter. Larger transactions continue to be our sweet spot. However, the timing of closure on these deals can be challenging to predict and the combination mix of SaaS revenue, perpetual license revenue adds complexity to our projections. For financial commentary, over to Peter and then I’ll come back and review some strategies and market comments before we open up for questions. Peter?

[Peter Goepfrich:]

Thank you, Vern. I’ll comment on a few additional items. Total revenue was $6.7 million for the first quarter, compared to $9.3 million last quarter. Software license and appliance revenue was $1.2 million for the first quarter, compared to $1.9 million last quarter. The decrease in software license and appliance revenue was primarily due to the seasonality of software license sales, in which the fourth quarter is typically the strongest quarter. Subscription, maintenance and support revenue was $4.8 million for the first quarter, compared to $6.2 million last quarter. Professional services and other revenue was $650,000 for the first quarter, compared to $1.2 million last quarter. As noted in to -- fourth quarter 2016 earnings release, fourth quarter revenue included subscription, maintenance and support revenue of $1.2 million, and professional services revenue of $0.4 million, a previously deferred revenue contingent on a customer’s acceptance, which was received in the fourth quarter. Going forward, subscription, maintenance and support revenue related to this customer is expected to be $300,000 annually. In 2017, we expect that software license and appliance revenue will continue to be dependent on large on-premise sales, which are difficult to forecast, and that subscription, maintenance and support revenue will grow steadily from a quarterly base approximately $5 million. Gross margin was 61.5% for the first quarter, compared to 70.7% last quarter. The benefit to the gross margin relating to the previously noted customer acceptance was 6.1% and 1.8% for the fourth quarter and full year 2016, respectively. The total gross margin percentage is expected to improve from the low 60s early in the year to the high 60s late in the year. Total gross margin will continue to be impacted by the timing and mix of large on-premise sales. Moving on to operating expenses and adjusted EBITDA, a non-GAAP measure. We continue to diligently manage our expense structure, significantly improving adjusted EBITDA. Compared to the corresponding periods last year, total operating expenses decreased 20% for the three months ended December 31, 2017, and adjusted EBITDA improved $1 million to a loss of $1.9 million for the three months ended March 31, 2017. Now for the balance sheet, cash, cash equivalents were $10.4 million as of March 31, 2017, and December 31, 2016, which is approximately $1.5 million more than expected due to better cash collections than forecasted and the deferral of the 2016 annual bonus payment from March to April. Cash at the end of the second quarter is expected to be approximately $7 million. As it relates to full year 2017 guidance, we are maintaining our revenue guidance of $31 million to $34 million and improving our net loss and our adjusted EBITDA guidance by approximately $1.5 million, reflecting our continued focus on expense management during these dynamic times. We continue to expect that we’ll be cash flow breakeven for the second half of 2017. Now back to Vern.

[Vern Hanzlik:]

Thanks, Peter. Let me review a few key operating highlights and that are related to our market and product direction. Qumu is focused on a two-pronged strategy; first, capitalize on our core strength and serve large enterprise with complex global video needs; and second, build new partnerships in the video ecosystem. During Q1, I validated our strategy by meeting with 15 large enterprise customers and prospects in Europe and in the U.S. It was a great opportunity to listen to their challenges as they undertake massive transformation in digital communication. They know the digital workforce inside and outside the firewall is going to create and consume a minimum of an estimate of 5 times more video over the next three years and they understand this will place huge demands on their network, on security and management. Qumu gives them the ability to manage the explosion of video content. During these customer meetings, we shared our upcoming new platform architecture that I alluded to earlier. We received positive feedback and validation that our strategy is directly in line with both the market and their needs. Towards that end, I’m very happy to tell you that we’ll be launching our new product architecture and solution later this month at our Customer Summit in New York and London. So please be on the lookout for announcements. We are currently briefing analysts and preparing a new website, among other launch activities. This announcement is both a vision and a set of solutions that give customers the most complete and extensible platform in the industry and will help grow our ecosystem of potential white label for our OEM partners. Speaking of partners, another takeaway from those customer meetings was their considerable interest in Qumu’s integration with Microsoft Office 365, 70% of customers that I talked to in the process were rolling out Skype for Business deployments. Skype for Business facilitates collaboration and knowledge transfer. Now they want to turn those conversations into video assets. They expressed their excitement about Qumu’s seamless integration with Skype for Business that lets them record Skype for Business calls, store, search and manage in their Qumu video library. Plus they can broadcast a live meeting or as a recording in the entire enterprise on the Qumu Pathfinder network. This fundamentally extends the value of Skype for Business from a collaboration tool to a streaming platform with Pathfinder’s intelligent network. With a strong customer interest in mind, we conducted a campaign last month showcasing our seamless integration with the entire Microsoft collaboration suite, which includes Yammer, SharePoint and Skype for Business. In summary, we are managing the business with an eye to the future. We have the support of large loyal customers as we transition to a more predictable, higher margin SaaS model versus perpetual license accounts. As I have mentioned many times, our land-and-expand strategy is working with our SaaS product providing entry into new enterprise customers. And finally, we’re evolving our enterprise video platform, which will open up powerful potential of growing our ecosystem of partners and other market opportunities. When I meet with customers, I always take the opportunity to ask them why they choose Qumu. They consistently respond that they count on Qumu, because of our deep expertise in complex enterprise deployments that we can deliver both inside and outside the firewall. The evolution of the market is changing. Unified communications is merging with enterprise video content management plus intelligent delivery. Customers are looking for a true platform that provides an end-to-end solution. We’re the only solution that provides software with all core functions in one platform. As the new digital enterprise opens up the floodgates for video, Qumu is positioned with the right product, right architecture and plus enterprise expertise to help customers achieve their digital vision. I’ll now open up the call for questions.

[Operator:]

Thank you, ladies and gentlemen. [Operator Instructions] And our first question comes from Mark Argento from Lake Street Capital. Your line is open.

[Mark Argento:]

Hey. Good morning, guys. Just wanted to get a better idea, cost structure, it sounds like, obviously, your guidance for this -- for the full year you’re planning a $1.5 million or $2 million in expenses you’re able to take on new model, where should we see those coming out of and how does that impact the longer term kind of opportunity?

[Vern Hanzlik:]

It come -- it generally across all areas from -- slightly from every area, so COGS to R&D to sales and marketing to G&A, and we don’t anticipate it impacting our ability to reflex and grow proactively in the future. We’re just being prudent at this point with managing the cost structure.

[Peter Goepfrich:]

Yeah. And I think just to add to that, Mark, I think that and I’ve had conversation with multiple people. I mean, we’re seeing some of these partnerships that are going to start to take hold, which helps us, as I mentioned with some of the things we’re doing with integration with the Microsoft suite, but also just in the unified comms and then those partnerships are starting to take hold in different vertical markets like healthcare and then also, our partnerships that are with larger integrators just taking our platforms and running them and creating practices around them. So that will help our ability to continue to create growth with less expense.

[Mark Argento:]

Got it. And then, I think, you had mentioned bonuses, have those been accrued for or how does that kind of impact the next quarter…

[Vern Hanzlik:]

Yes.

[Mark Argento:]

… in terms of the numbers?

[Vern Hanzlik:]

It was all timing. It was accrued for at the end of 2016 and normally we pay it out in March but didn’t get paid out until April.

[Mark Argento:]

Perfect. And then more of a strategic question, so it seems to me the way this market’s evolving that the model -- your model almost become more of a middleware type model where you are kind of providing that connectivity between the various bigger the Skype for Business and other kind of input devices or consumption devices. Do you guys think about the business maybe indifferently than you did six months or a year ago and any kind of major strategic changes you could see on the horizon in terms of how you go to market?

[Vern Hanzlik:]

Yeah. Well, I did comment little bit on that, Mark, but I think the net of it is we’re becoming more of this video hub where the inputs are come, they are endless on the inside and then the core focus for us is to make sure we’re managing these video assets at scale and then also providing this intelligent, which we branded around our Pathfinder and more of an intelligent delivery network that we can expose from an enterprise CDN perspective inside the firewall. So there will be opportunities for us to people leveraging up our core technologies more of a platform. And as you said, a middleware piece where they’re talking to our services. I mean, we’ll have -- we have a lot of different partnerships that we’ll announce here later this month and we’re calling our extensions, which are extensions to our core platform for what we provide and then we’ll continue to build that out, and then those will also bring us into different vertical markets also.

[Mark Argento:]

Okay. Great. And then just one more housekeeping, Peter, did you say you expect to be cash flow breakeven or positive in the second half, I hear you right?

[Peter Goepfrich:]

Yes.

[Mark Argento:]

You guys are comfortable...

[Peter Goepfrich:]

Cash flow breakeven second half of the year.

[Mark Argento:]

So you’re comfortable with the cash levels, with the balance sheet, where it sits right now to kind of get you to where you need to be?

[Peter Goepfrich:]

Correct.

[Mark Argento:]

Great. Thanks guys.

[Vern Hanzlik:]

Thanks, Mark.

[Operator:]

And our next question comes from Jeff VanRhee with Craig-Hallum. Your line is open.

[Jeff VanRhee:]

Yeah. Thank you. Just a couple, first, I guess, Peter, I wanted to clarify on the deals. You talked about the two pushes, $1.8 million in value and that they both closed in the first week of the second quarter. But I missed something about, you said taken in Q1, I want to be sure that the revenue for those all fall in Q2, correct?

[Vern Hanzlik:]

That’s correct, Jeff. Yeah. I would add, probably, I -- that was me so it’s…

[Jeff VanRhee:]

Okay.

[Vern Hanzlik:]

Yeah. That revenue for the on-premise field would be in Q2 and the -- that the subscription one would be a ratable deal anyway.

[Jeff VanRhee:]

Got it. Yeah. Okay. Just wanted to be sure.

[Vern Hanzlik:]

Yeah.

[Jeff VanRhee:]

And then, I guess, last quarter, you were talking about expectations of 30% to 40% bookings growth for ‘17, if I recall, still a valid number, is that guidance, are you reiterating or just expressing comfort with that here?

[Vern Hanzlik:]

Yeah.

[Jeff VanRhee:]

Okay. And then, so the Q2, essentially looking for ballpark flattish sequentially, with such a strong start to the quarter, right. You’ve got a couple of big ones in. I’m surprised it’s probably -- it’s not a little bit better. Is there anything else -- are you seeing other deals like all cycles essentially pushing, so these pushed into the quarter, but you had to push a few out that were in the quarter, how should I think of that?

[Vern Hanzlik:]

I think that’s the best way to think about it, Jeff. I think some of them. That’s why we got a range on it the way we do. Some of them can drop end of the quarter. We’re continuing to negotiate and so they will. So that’s the variability of -- when I -- as I’ve continued to talk about, we’re trying to be as prudent as possible how we’re articulating this to everybody, because we’ve got our baseline of our subscription stuff, which we’ve got base, as Peter mentioned, around that $5 million range and then our variables per quarter are the on-prem stuff and then stuff that falls in from a subscription perspective we get it earlier in the quarter. So, I think that there are ones that we’re negotiating that kind on the bubble and we just wanted to have that flexibility. But there are -- as we see significant type things that we’re in proof-of-concepts, where the budget’s going to land and are we going to be able to get it done. So we just wanted to be conservative. But with also there’s the pipeline, as I mentioned, is robust and we’re seeing it more in our second half of the year than we are in the first two quarters.

[Jeff VanRhee:]

How much of the sort of the delayed cycles do you sense is due to architecture sort of feature issues, things that are going to be addressed to this new launch versus potentially others/sales execution?

[Vern Hanzlik:]

Some of them are to that. I think that when people want to have a validation like we’re validating something right now in a hybrid deployment for a particular client, it’s a larger hybrid where it’s cloud and some of the things we’re doing feature-wise and we’re testing that with them, validation is a larger organization. So those things do come into play for sure. Also, just as we’re rolling this out, we had some opportunities to show this to folks and they got excited about it, we are on the unified communications piece. We want to validate it internally to make sure it’s all working and these are even existing customers, because it’s a big -- it’s a bigger play. We’re enabling 1,000 end points in a big bank. They want to make sure that you’re going to be able to handle the scale. So there are just things like that that happened in the fabric in these larger enterprise that they want to validate and as we’re -- we’ve got other ones where we’re rolling out larger delivery networks and they want to test and validate. So that is a valid point.

[Jeff VanRhee:]

How would you describe the sales execution progression over the last 18 months? I think in the early ‘16 you moved to this, I think, it was -- if I recall a named account strategy. It’s been a little while, but I think you kind of went through a few iterations. Where do you feel you are now in that evolution, are we still sort of searching for the right structure, do you feel like they’ve got it and they’re executing to the fullest with what they have right now in product and they just need this new architecture, obviously, I’m just trying to get a sense of do you think you’re essentially holding share, losing share, gaining share, just those kind of dynamics, however, you can frame that for me?

[Vern Hanzlik:]

Yeah. Well, let me answer it twofold, Jeff, because, I think, what I alluded to in my -- our two-pronged strategy is, one, we’re holding share in our base of our customers and we’re expanding in those base and we continue to show that with our existing revenue out of our base and transactions. And I also look at our account base marketing strategy, the focus of our 2,000 accounts that we’ve been focusing on as we sit for 2017 and as we look to 2018, we would expand out of that with more self-service and things like that in our cloud. So that will continue like, so we set this objective of 50 new customers this year on the enterprise in that 2,000, so that’s -- we’re continuing to track on that. The second piece of that is, where we’re changing, and I think, the question earlier from Mark was that, we’re changing the strategy a little bit in our partnerships where people are taking our product into markets that we’re not into. And so that will help us from execution perspective beyond and creates more draft and those are the things that we would message to the market more effectively because as we look at our pipelines right now the things that we’re doing. So the partnerships are starting to evolve and the BT stuff is kicking off and we’re starting to see traction there. So I think that the strategy is going to help us because we’ve created a whole service based architecture with all our major points in the product so that people can take it and run with it. In addition to that, our customers are resonating so our account base are getting more horizontal, so we can sell more to our existing base and as we lay this out competitively to compete with the players that are competing in our defined market in this Global 2000, which are the largest businesses in the world. We think that we can stack up against anybody with an end-to-end solution, a lot of the competitive landscape is trying to put on intelligent delivery onto their solutions inside the firewall. We know that that is paramount. You have to have a delivery network for video as it expands. So we feel really bullish on where our strategy is. The validation of where our customers are and just the natural excitement based on what we’re doing that we can solve problems both inside the firewall and externally.

[Jeff VanRhee:]

Got it. And I guess, last then, the -- where are you -- what is the sales org now in terms of size and structure?

[Vern Hanzlik:]

We’ve got seven what we call enterprise people, Jeff, that are selling to the largest businesses and we got six sort of account managers, which are doing sort of the mid-level size deals and then we have two BT people, so the total is about 15 right now that are -- that have a quota on their head.

[Jeff VanRhee:]

Got it. Okay. Great. Thank you.

[Operator:]

And our next question comes from Glenn Mattson with Ladenburg Thalman. Your line is open.

[Glenn Mattson:]

Hi. Good morning. I guess, interesting to hear about, I mean, pipeline 2.5 times coverage, sounds like that improved during the quarter and closing a large number of your deals, as -- I think you said 60% of the opportunities you’re tracking you closed.

[Vern Hanzlik:]

Yeah.

[Glenn Mattson:]

So, it seems like the sales effort is resulting in better performance, but we are curious about the base of what we have now and just kind of protecting that flank of subscription revenue. You’re talking about 90% renewal rates, but do you have any very large renewals coming up this year?

[Vern Hanzlik:]

Yeah. We’ve got large renewals every quarter, Glenn. And so, I think, we’re -- that’s what we focus on the most is that customer sat piece and the renewal rates on a quarterly basis to show up that base.

[Glenn Mattson:]

Okay. But any like top five customers or, I mean, I know top 10 is a big percent of the revenue, but those flow through pretty regularly I guess?

[Vern Hanzlik:]

They do, I mean, we -- they’re always, the bigger ones are always a little bit at risk, but I think that we -- that depends on whether they’re going to change out a big infrastructure or not and our bet is sometimes that they’re not going to change that out. So, but we do -- we have over 300,000 renewals on a quarterly basis for our client base and we continue to track those, we see them out through the whole year, so we’re very focused on them.

[Glenn Mattson:]

Okay. And then, Peter, just on the receivables, the collections, what was going on there, a significant drop sequentially?

[Peter Goepfrich:]

Yeah. The significant improvement, we didn’t have the reflective...

[Glenn Mattson:]

No. I mean, for drop in the -- on the balance sheet you guys -- significant improvement, yeah.

[Peter Goepfrich:]

The significant improvement on collections side, probably about $1 million better than we would have anticipated on the actual collection side. That said, we were light on our sale based on our guidance and that was the primary results why it went down a little bit more than we would have anticipated on a balance sheet approach.

[Glenn Mattson:]

Okay. Great. That’s it for me. Thanks guys.

[Vern Hanzlik:]

Thanks, Glenn.

[Operator:]

[Operator Instructions] Our next question comes from Neil Cataldi from Blueprint Capital. Your line is open.

[Neil Cataldi:]

Hi, guys. IBM, who bought Ustream last year, put out some interesting data last month, high level, they talked about the increasing use of video within the enterprise, managers relying more on streaming video in the enterprise and they noted that mobile viewership of cloud video has increased five-fold just in 2016 versus 2015. My question to you is this. Your customer list is great. I think, I speak for most investors who are sort of waiting for this inflection point with growth and you’ve referenced this land-and-expand strategy in the past. What’s holding up the customer base today, what are you seeing from them or hearing from them and does this recent IBM data maybe suggest the change in sentiment where they’re going to start moving a little bit faster?

[Vern Hanzlik:]

I can’t -- the activity that we’re seeing, Neil, the internal networks where the people are becoming more aware that they need to have a enterprise CDN inside the firewall and I referenced 5 times growth over the next three years just on these corporate networks and IT is becoming, we’ve got proof-of-concepts that we’re running right now in larger organizations that are over 100,000 employees, that they’re trying to figure out and this is mostly for live and VOD. So the pace that this market is going to pick up I think is over the next two year to three years where people are going to see the pain on their inside the firewall needs and they’re going to have to build on a network, why we’re starting to message more and more our enterprise CDN, which are Pathfinder intelligent network, which gives them the capability to do that in a diversified fashion and alleviate that pain that they’re going to have on their network as they start to produce more and more video on their backbones. So I don’t know that. We’re tracking the timing of that perceived inflection point. It is real. It is going to happen and we’re seeing it more and more as people we’re talking to more to the, we’re getting more on the business side on our external communication stuff with cloud and smaller deals, but when we’re doing hybrid deals, if they’re using cloud with our Pathfinder stuff on-prem or it’s a large on-premise deal, it depends, like large on-premise deals are mostly dealing with IP, with the IT organization. They’re validating how it fits into their fabric. It’s going to run in their data center and we continue to see opportunities in that even as we transition to this more SaaS model over the next couple of years. So the -- IBM is right that they’re going to do that. They’ve made some big investments there. But I think their challenge with this inside the firewall need and they’re going to have -- they need to be able to approach that, you have to create a solution inside the firewall in order to do it, because it’s delivered on a secure network.

[Neil Cataldi:]

Okay. Thanks. And one more sort of high level too, I think, we’ve started to see more M&A activity in the unified communications space. You guys have referenced working with some companies there. Are you seeing any change in how you see companies are looking at video and whether there’s a little bit more of an interest level there to expand their product suite?

[Vern Hanzlik:]

Yeah. Well, I mean, as I talked about our, I kind of focused on the Microsoft stuff that we’re doing with social business with Yammer and SharePoint. But it was apparent to me in talking to a lot of customers and the majority of them were in Europe that were rolling out Skype for Business and these were very large organizations, all north of 50,000 employees, where they’re starting to look at how much of these video assets, because the phone calls are changing to video calls. And the video calls need to be, are they compliance based and do you have to have a management backend to do that. We demonstrated some of our Skype for Business interface to those folks. So there’s definitely an appetite for how much do they need the management. So the video content management component of those assets are going to become more prevalent and there’s definitely a need for that at scale. So the convergence, as I just closed on is the unified communications market, whether it’s Skype for Business, whether it’s [inaudible] (31

[Neil Cataldi:]

Okay. Great. Thanks, guys.

[Vern Hanzlik:]

All right. Thanks, Neil.

[Peter Goepfrich:]

Thanks, Neil.

[Neil Cataldi:]

Yeah.

[Operator:]

And I’m showing no further questions. I would now like to turn the call over to Vern Hanzlik, President and CEO for closing remarks.

[Vern Hanzlik:]

Thank you. I want to thank everybody for joining us today and let us know if you have any questions and have a great day.

[Operator:]

This does conclude the program. You may all disconnect. Everyone have a great day.