Qumu Corporation
Q2 2017 Earnings Call Transcript

Published: 5 Aug 2017

[Operator:]

Good afternoon, ladies and gentlemen, and welcome to Qumu Corporation Second Quarter 2017 Conference Call. At this time all participants are in a listen only mode. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Peter Goepfrich, CFO.

[Peter Goepfrich:]

Good morning, thank you for joining our second 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 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 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 features that are currently available. We assume no obligation to and do not intend to update forward-looking statements. I now turn the call over to Vern.

[Vernon 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 another solid quarter, and we continue manage the business while simultaneously making bold strategic product advances building our team. Last quarter, I alluded to exciting new development underway at that time. According to the plan, in May we launched our Qumu Qx vision and solutions set, the most complete extensible platform in the industry. That news was very enthusiastically received by industry analysts, prospects and customers. During the global rollout with customer summits in New York and London, each event included presentations by large loyal Qumu customers, who highlighted their own compelling stories about Qumu's role in their use of video to transform their business. In Q2, we also made key additions to Qumu's leadership team, Vice President of Worldwide Channel and Alliances and Vice President of Marketing, to increase our market penetration. Let me touch on a few financial highlights. Revenues for the quarter is $6.7 million, and a net loss of $2.7 million were within our guidance, results exceeded guidance in adjusted EBITDA reflecting strong operational efficiencies as we continue to manage our finances. I'd like to underscore the gross margins in the 66% range, surpassed even our major competitors and products that are exclusively cloud based. We are successfully transitioning to a more predictable Software as a Service model, while maintaining the focus on large organizations globally delivering on-premise and cloud solutions. Our innovative QX strategy is resonating with our customers. During the quarter, we signed 8 new accounts, including the British Broadcasting Corporation, PricewaterhouseCoopers and Centene Corporation. Two of the new customers represented $1.2 million of annualized new bookings. Due to our land and expand sale strategy, we also grew our footprint in existing account. 20 existing customers added to their deployments with capabilities such as

[Peter Goepfrich:]

Thank you, Vern. I'll comment on a few additional items. Total revenue was $6.7 million for the second quarter compared to $6.7 million last quarter. Software license and appliance revenue was $929,000 for the second quarter compared to $1.2 million last quarter. The decrease in software license and appliance revenue was primarily due to a decrease in appliance revenue offset by an increase in license revenue. Subscription, maintenance and support revenue was $5.1 million for the second quarter compared to $4.8 million last quarter. Professional services and other revenue was $615,000 for the second quarter compared to $653,000 last quarter. 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. As Vern noted, during the fourth quarter our composition of deferred revenue will shift toward perpetual licenses versus recurring revenue due to a large recurring contract being discontinued. As a result, subscription, maintenance and support revenue is expected to be in the mid-to high $4 million range in the fourth quarter. Gross margin was 65.6% for the second quarter compared to 61.5% last quarter. Total gross margin percentage is expected to continue and improve, to improve to the high 60s late in the year. Gross margins 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 manage -- diligently manage our expense structure, significantly improving adjusted EBITDA. Compared to the corresponding period last year, total operating expenses decreased 17% for the three months ended June 30, 2017, and adjusted EBITDA improved $2 million to a loss of $1 million for the 3 months ended June 30, 2017. Now for the balance sheet. Cash and cash equivalents were $9 million as of June 30, 2017 compared $10.4 million as of March 31, 2017 which is approximately $2 million more than expected due to better cash collections than forecasted and the timing of payments to vendors. Cash at the end of third quarter is expected to be approximately $7 million. As it relates to 2017 guidance, we are maintaining our previously provided guidance. Additionally, we expect that we'll be cash flow breakeven for the fourth quarter 2017. Now back to Vern.

[Vernon Hanzlik:]

Thanks, Peter. Let me review a few key operating highlights as it relates to our market and product direction. Qumu remains focused on a 2-pronged strategy. One, capitalize on our core strength of serving large enterprise with complex global video needs and two, build new partnerships in the video ecosystem, leveraging our Qx extensible platform. Our new Qx vision and solutions set addresses both elements. First, the complexity of video within global enterprises. Under Qx, we opened our platform-as-a-service layer architecture. Key advantage for our new open architecture is its extensibility, the ability of our product to easily integrate with other systems that large enterprises are implementing. Examples of these are mobile video, unified communications, social portals, digital signage and IPTV solutions; all things that create a need for higher performance delivery in management of video. That's why we call our solution, the Enterprise Video Hub because we help organizations bringing it all together. As for the second part of our 2-pronged strategy, Qx also dynamically increases our ability to build our partner ecosystem. As part of the new service layer architecture, we remanage -- reimagined our own category leading enterprise content delivery network, eCDM, Pathfinder as a standalone product. This creates new opportunities for third-party partners, allowing them to bring the power of intelligent, optimized eCDM into their own solution. As I mentioned earlier, Pathfinder is already being deployed in hybrid environments with Qumu Cloud. Releasing it as a standalone product greatly enhances our flexibility and its potential. You'll hear more about Pathfinder as a standalone technology over the next 6 to 18 months. With our Qx vision now providing a clear strategic map for organizations, we also made advances in our product set over the course of past 90 days with multiple product releases. For example, new Qumu mobile apps with a much better user experience, self-service usability for our Unified Communications Gateway. To further underscore the impact of our partner ecosystem, I'd like to mention 3 great example of how Qumu and partners are using our products to open this to develop solutions. These examples of our partner relationships gives Qumu instant access to massive vertical markets where users have limited or no access to video. First, IPTV. IPTV is licensed television, news, finance, other content streamed over company's internet protocol-based networks. With our software-defined IPTV solution, developed by a partner, Pathfinder becomes the delivery network, replacing cumbersome, costly proprietary hardware. Pathfinder is more configurable, which helps drive down cost for the enterprise. Ultimately, it means more -- many more users gain access to IPTV and existing users have more flexibility. And another example is VDI, also called desktop virtualization. Desktop virtualization has become a mainstream IT strategy, especially for large organizations that have deployed thousands or even tens of thousands in client desktops, with leading solutions like Citrix and VMware. Qumu's developed VDI solution makes it easier, most cost effective to bring high-quality video to these users. Watch for more news coming about our partnership with Dell, one of the leaders in desktop vision -- [visualization]. The third example is Microsoft. Last quarter, I mentioned tremendous momentum we see inside large customers with Office 365. In particular, Skype for Business, we continue our commitment to our partnership with Microsoft to help customers bring and manage and deliver -- that Qumu provides. Through this partnership, we have a great opportunity to power video providing the management and delivery hub via Pathfinder for the entire suite of products in the customers' Microsoft ecosystem, including Skype for Business, SharePoint and Yammer. In direct support of our Qx strategy, we also expanded our executive team. John Poole will lead worldwide growth and strategic partnerships as Vice President of Worldwide Channels and Alliances. John brings 25 years of experience to voice, data, video networking and unified communications industry, including 10 years at Polycom. He will tap his extensive network to build Qumu's ecosystem of third-party developers, resellers, including hardware and software developers, service providers and system integrators. Our new Vice President of Marketing, Eric Rudolf, will work with sales and channel development team to amplify Qumu's trusted brand and accelerate the growth of Qumu's list of Fortune 1,000 clients. Eric brings deep experience, marketing SaaS and other technologies to key vertical industries, where video is growing, including education, manufacturing, supply chain, professional development, e-commerce and automotive. Video is the place to be. Cisco estimated by 2021 global IP traffic will be 82% of all consumer internet traffic. A parallel surge in video growth is underway in large enterprises. Our customer see that video is growing fast. They know through research that their own experience that people learn and perform better with video. They also know live and mobile videos is growing exponentially. Their concern is not, will it happen? It's here now. Success hinges on whether they can manage it and scale to it. That's why many of the world's largest organizations work with Qumu because we have an enterprise-grade product and the experience to support them. In summary, Q2 was pivotal in proving that we can manage the business and make bold strategic advances towards the future. We have the support of our large loyal customers. Our land-and-expand strategy is working with our SaaS product providing entry into new enterprise customers. And finally, we continue to innovate, evolve our entire video platform to a new open architecture, create powerful potential of growing in our ecosystem in partners and other market opportunities. As the new digital enterprise opens the floodgates for video, Qumu is positioned with the right product, right architecture plus enterprise expertise to help our customers achieve their digital vision. We are helping these large, loyal customers move their digital transformation forward at the pace they want. With the increased adoption of video among our prospects and clients, who see it as a staple of their digital workforce, we anticipate a strong second half to 2017. 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 open. Please go ahead.

[Jeff Van Rhee:]

So, Vernon, couple of questions, I guess. Start with respect to bookings expectations. You're still comfortable with 30 to 40 for the year? And then how do you feel or how is it change with respect to what you see as the ultimate split, prem versus cloud for the year?

[Vernon Hanzlik:]

Yes, the booking numbers, I feel comfortable with, Jeff. And then, we are going to see a higher, as I commented on the mix. We don't have the exact percentage right now, but obviously, it will be a higher mix on the perpetual side both in Q3 and Q4. We see the ASPs on our land and expand strategy are smaller. So I don't have the exact number right now but I can certainly get it to you.

[Jeff Van Rhee:]

Okay. All right. And then, Peter, I think, it was in your piece, you were talking about that Q4 run for the recurring/subscription piece. And I guess, just talk to me about the decline there. It sounds like a sized customer, maybe a seven-figure annual customer, is moving. What are they doing? They're leaving the subscription? Are they going to a premise solution from you? Are they leaving altogether? Just a little color on what's going on with that customer.

[Vernon Hanzlik:]

I'll take it, Jeff. I mean, its organization is just transitioning. And it's not quite that high, but I think it's an organization that invested in another piece of technology, and they're just moving to a different platform. There's potential opportunities for our Pathfinder delivery in there, so we will continue to kind of push on that.

[Jeff Van Rhee:]

Okay. And then -- and I guess, lastly, I know you've worked hard with respect to the marketing and sales work to drive a more robust pipeline and higher coverage. I think you referenced the 2x coverage. Just talk about where you are satisfaction-wise, with both the lead generation process at this point, and how you see as it is having progressed recently. And then also the ability to close deals. I mean, obviously, namely it is the inability to drive the faster organic growth. Do you feel like it's a competitive differentiation issue on the product side? Do you feel it's more of a just not positioned well, not getting invited to cycle? Just walk me through kind of where do you think you are and which areas you're really most focused on.

[Vernon Hanzlik:]

So on the larger enterprise deals, it's timing of the amount of time it takes to get them closed, and we feel very competitive there, I think that we made a mark with a lot of people as we rolled out the Qx strategy more formal in May. So that's helped on the larger enterprise deals, and we have a lot of pilots going on there, and we feel confident in our competitive landscape there, owning the whole stack that we talk about. And then, on the other area, on the digital footprint on the digital marketing side, Jeff, as Eric's been onboard kind of evaluating, what I would call, our digital footprint. We've been doing a lot of stuff just from a eyeballs to create more -- what I would call, more opportunities that we can do on our land-and-expand with cloud and cloud hybrid which -- that's an area that we're seeing a pickup in the pipeline, and we're trying to see the conversion on that. So those are, obviously, smaller transactions. But our digital marketing effort right now is starting to pick up some steam from the perspective of more things coming over the transom. You saw we've upgraded the website. We've got digital campaigns going on every month, multiple ones. We've got a bunch of PR stuff that we're just doing internally. Just getting the name and the brand and how we're doing that. So I would say that we'll see more pickup on that as we continue to focus. We're going to expand the footprint a little bit beyond the 2,000 that we talked about, I mean, without diffusing that focus. The where we win and where we're the most competitive is in these large complex environments because we just have the ability to answer all the questions there. And our competitive landscape is -- they have to piecemeal things together so that's helps us a lot. So I would say that the higher enterprise, the larger deals, Jeff, is just timing. And I kind of commented a little bit on that, the competitive stuff that we see with cloud, we've gotten -- I would say fivefold more competitive with our cloud product against other cloud products in an addition to hybrid piece, that's a differentiator for us. We're putting a lot of those in play right now, which is exciting, and we'll see more pickup on that. But I don't anticipate a lot of that until we get into 2018 where it's significant in our recurring revenue base. Where we're seeing the revenue pickup is in our larger perpetual deals that we've got in the pipeline. We're doing proof of concepts, and we're just starting to negotiate to get those over the line. So that's -- but I feel, our digital footprint is going to increase, and we're going to get more over the transom, we track that effectively. Weekly, we know who's on our website, how many times they've been on there. We use a piece of technology that's more of a playbook for our digital. So we know what's going on and who's touching us, and then it's ability to close and compete. And so that's kind of -- that's an area that we need to pick up on -- based on where we're investing in sales and marketing right now.

[Operator:]

Your next question comes from the line of Mark Argento with Lake Street Capital. Your line is open, please go ahead.

[John Godin:]

This is John Godin on for Mark. I know you said, you expanded relationships with about 20 of your current customers, is this kind of in line with your expectations? Was it better? And what do you see going forward as far as the potential by continue expanding right now with your current customer base?

[Vernon Hanzlik:]

Yes, John, I -- It's -- we -- It's in line with what we -- we had more transactions, some of them have converted. We had -- like I'd mentioned, there was a couple of them we just didn't get over the line because they were kind of committed for the quarter, that they're -- one of them was more delivery-focused and one was more Unified Communications focused. But we anticipate our base expending, as we're -- we've been talking about in our account based marketing. We are getting very horizontal on a broad brush of our customers, and they are starting to see the demand, as I just commented on the market, in general. The pickup of video, and besides just putting up a portal with video and doing live broadcasts, which we're really good at is, user generated content, the mobile piece. So we see the base picking up, and we have a large percentage of our revenue that comes out of our base. We have deals in our pipeline that we look at right now that are just expansion to our existing base. That's why you get a little more confidence in what's going on in addition to the larger proof-of-concepts we're doing. So it's in line, to answer your first question, and we see it continuing to expand. And we're going to continue that because we are under-penetrated in our customer base.

[John Godin:]

Awesome. And I know you mentioned some particular strength with sort of financial services companies. Are there any other verticals where you guys are seeing particular strength, going forward?

[Vernon Hanzlik:]

What we're seeing, it's our main pharmaceuticals companies. We see communications companies expanding. We see manufacturing -- large manufacturers, and we see some defense areas that are growing -- that are looking -- evaluating our partner -- our platform through partners, and that's both -- and health care is the other one. So we are doing some things that -- the [ENE] health care video's a big part of that. There's a lot of compliance that comes around that. So those are the areas that we're going to continue to focus on. As I've said, over the time here is, that we're not moving into higher education. We are staying laser focus on enterprise whether that's large consulting organizations. And the ones that seem to be growing or the pharma ones, health care. Beyond, we are going to -- in financial services includes insurance, and so that insurance includes large insurance companies that have health care. Things -- I mentioned Centene which is large health care, and that is just an entry level for where we started with them. So those are the areas that we continue to see exciting opportunity to expand and grow.

[Operator:]

[Operator Instructions] Your next question comes from the line of Neil Cataldi with Blueprint Capital Management.

[Neil Cataldi:]

In your prepared remarks, you said video is here now. And just listening to how you commented about some of these customer expansions, it sounds like I'm hearing a different posture to that than maybe in the past. Have you observed a behavioral change over, say, the past 6 months with the customer base and the new enterprises you're talking to, as far as their motivation to take action with video?

[Vernon Hanzlik:]

The short answer, Neil, is yes. So we have more projects, more proof-of-concepts that people are saying look we've got a demand, we've got to kind of get this. It's the end users versus the IT, which is one of our challenges. When they slow down it's when IT gets involved. And it's this arm wrestling between a hybrid or a cloud or do they want it on-prem because of security reasons, and depends on where the evolution of the client is. The demand and the need for it, driven by the end-user community, is quite large, and we see that as a consistent theme. Where we -- where It kind of -- It doesn't -- I think that the pressure of it is becoming more apparent. That's why with our land and expand strategy, we can get in the door in the workgroups at a workgroup budget, but really where the magic happens is when we bring IT in. And we start to lay out a bigger delivery strategy with the complexity of video is on a privatized network, and that education piece, which drives much larger transactions and we have to increment our way through that. So, yes, there is a definite appetite and there is a definite change in what people are doing. I think that we're trying to be cautious and prudent on what the pace of investment is. So as we look at those not just the customers but our prospect base and how it's going to grow and how fast it's going to grow and what we can communicate externally to our shareholders.

[Neil Cataldi:]

Okay. But if that IT component sort of become a little bit easier for you guys, that would maybe allow for the sale cycle to speed up a little bit or for these follow-on orders to come in faster. Is that a fair hypothetical?

[Vernon Hanzlik:]

That's not -- well, it's very fair and not hypothetical. I'll give you a real life example. We mentioned the BBC as one of our deals last quarter, they were not a customer, they were at one of our Qx, as I said, we have some prospects at these Qx announcements. They were actually there, we had companies like Barclays and GSK actually speak. That was a pivotal point of getting that accelerated and we're dealing -- that's a internal communication platform for video in a broadcast organization and that really happened. And I think that they're starting to see in those types of proof cases where large organization are saying, here's what we're doing. We had companies like Aetna, GSK and Barclays all speak of these things. It's extremely powerful and these are IT folks that are talking of giving the realities of what it really takes to have a 45,000 live broadcast and not have any failures, and it's compelling. And those types of -- those are the type of marketing things that we're -- you'll continue to see that we get out anecdotally to the base in to the market of -- our -- when we talk about our expertise is that we're in the trenches with not just 10 accounts, we've got 50 of these things that are running at scale and that's where we'll get more effect out of these IT guys.

[Neil Cataldi:]

And was that Qx specific? How should we think about the sales cycle going forward with Qx being the focus? Might it be a little shorter than what you guys have been doing previously?

[Vernon Hanzlik:]

I wouldn't -- I would not say that right now, until we get more evidence. I would say that we would be a little bit more cautious about. I think what happened when we were working along all of this in 2016, we had hesitation in the market, but what Qx really brings is to open this of our architecture and what clients want to know, where are you going, Qumu? And what are we doing with your platform inside and outside the firewall? And what we -- what I -- as I mentioned in my remarks was, there was this really acceptance of that, that's the right way. I had one client tell us we've been waiting for you to kind of get this out into the masses, so you can -- we can see where you're going and it's evidenced. So that -- I would say that I'm cautious about getting too ahead of ourselves as far as the acceptance and demand, because as I also mentioned, we opened up the Pathfinder stuff. And we're putting some things up. And we're going to be testing some things. And we think that, that's drive a whole new partnership with different types of things that we're seeing -- that we haven't seen traditionally from this organization. So more to come of that but, I think that you're on the right thread though.

[Neil Cataldi:]

And my last question just pertains to the UC environment. And I know you guys have some partnerships there. Are you seeing any change in appetite from that side, whether it's within the partnerships you have or new partnerships that could come? For me, I see a logical kind of marriage there as you see continues to gain a foothold.

[Vernon Hanzlik:]

Well, we kind of started to kind of message this to the market about 18 months ago. I think that we're -- there is a definitive appetite in the -- as I mentioned, in our partnership with Microsoft ecosystem with Skype for Business. And I'll give you -- the real live -- so the Pexip and the other software-based Unified Communications, we see a definite movement in there. We are doing a lot of work in our Unified Communications gateway in order to make it more -- I commented on self-service, so people want to come into a room and start a broadcast from a regular videoconferencing room, and that is all over the board. So we see that as a big competitive advantage. We're doing lots of work there. But the one that's the most exciting that gets to the most desktops is Skype for Business, so we've built an interface inside the Skype for Business. We're building things inside of Outlook. We're leveraging Pathfinder as a delivery network as Skype for Business is a front end, and we are managing those assets. So where I would say in the pace is, is that there's a definite hole that we can surmise on delivery for using Skype for Business as a delivery network for live events or just people want to be passive participants, and there is a definite appetite in our customer base. Skype for Business is much more pervasive in Europe, then I think it's deploying here in the U.S., but they seem to be a much more pervasive group wanting -- seeing the limitations above a couple of hundred people where we can actually fill that gap. And that kind of fits into our strategy there in addition to other things. The management of those assets, the editing of them, we've got couple of large banks that want to edit these meetings after the fact, then put them all for usage. So we just see there is a -- that the amount of volume of video there is tremendous, and you have to be able to manage at scale. And then when you put it out to the masses, you got to have a delivery network. So it's a cause and effect, and we see it as it's going to grow more over next 12 to 18 months with great demands where it'll be opportunistic for us.

[Operator:]

Your next question comes from the line of Glenn Mattson with Ladenburg Thalmann. Your line is open. Please go ahead.

[Glenn Mattson:]

Just a little more clarity, you mentioned the customers that's transitioning away. Can you talk a little bit -- give a little bit more color on that. Was it an issue of someone came in at a different price point? Or were there features that they were looking for that were different from what you're offering? Just a little more color on why they chose to shift away.

[Vernon Hanzlik:]

I think the story on why they're shifting away is that they just bought a competitive product and they wanted to shift away. And that was the core, Glenn. It wasn't anything with our product. I mean, we were functioning great. They just bought a competitive organization and wanted to use that platform. We still think that -- we've been communicating. That's why we wanted to be transparent to our shareholders we still think there's opportunities there. We'll see how things progress. So we're still talking to them that, and that opportunity comes through partnership, but it's -- it'll be interesting to see how it unfolds. But we've -- right now, we are just kind of brought it out of our models, and we're kind of moving on because of the nature of it. But it wasn't anything that we did, wasn't anything about our technology, wasn't anything about our innovation. It was just an organization decided that they were going to invest in a company and go a different route.

[Glenn Mattson:]

Okay. I guess, you anticipate -- I guess the underlying theme would be that the underlying business is going quite well, being that you're looking to grow through that. I guess, you did give a kind of a bookings target, but can you talk to long-term growth rates given that the sales force is kind of been reorganized at this point, the new products have been rolled out. Can you give us just the feel for what you think the outlook over multiyear period would be for what the growth rate of the business should be?

[Vernon Hanzlik:]

Well, I think that we said that we're -- where we were this year, I mean, I think you've got a look at somewhere between the 8% and 15% as we move into 2018. And we haven't really -- I'm looking at how the partnerships pick up and those types of things. So that's kind of where we as we look to 2018 right now, because we've kind of -- things will come into our pipeline and things like that for 2017, and we'll add and subtract based on coverage here and based on things that are going on. So that's kind of the -- where we're looking at that. And then some of these partnerships tend to take on a different life, which would increase that growth, but we want to be a little -- we want to be pragmatic on how we're doing that. So that's how we're thinking about it right now.

[Operator:]

Ladies and gentlemen, I'm showing no further questions at this time. I would like to turn the conference back to Peter Goepfrich.

[Peter Goepfrich:]

Thanks, I'll actually hand the call over to Vern.

[Vernon Hanzlik:]

Well, thank you, again, for joining us today. Let us know if you have any questions, and have a great day.

[Operator:]

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