Qumu Corporation
Q3 2017 Earnings Call Transcript

Published: 1 Nov 2017

[Operator:]

Good day, ladies and gentlemen, and welcome to the Qumu Third 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 now like to introduce your host for today’s conference, Mr. Vernon Hanzlik, President and CEO. Sir, you may begin.

[Vernon Hanzlik:]

Good morning, and thank you for joining our third quarter 2017 earnings conference call. 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 current recent Annual Report on Form 10-K and any subsequently filed periodic reports on Form 10-Q. Any unreleased features or services references in this presentation or other public statements that are currently available 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 currently are available. We assume no obligation to and do not intend to update any forward-looking statements. I am sure you saw the announcement last week our CFO, Peter Goepfrich is departing effective November 6, after accepting another position with the private equity company. I want to say thanks to Peter. He did a phenomenal job guiding the company transition to position a solid expense management and reporting compliance. We have a search firm already working on candidate for our new CFO. Meanwhile, with our earnings release yesterday, we announced an Interim CFO, Dave Ristow will join effective November 7, 2017. Dave brings 20 years of experience in the CFO role, the leadership expertise and strategic planning, stakeholder relations, financial process design and corporate governance. He has worked with companies in various industries, software-as-a-services, professional service and med tech. I would like to make a few comments before I review the numbers. Qumu’s third quarter 2017 was an exciting quarter as we continue to see tangible results from our Qumu Qx vision as we announced five months ago. Qx is an end-to-end suite of solutions, the most complete extensible platform in the industry. Concurrent with this both product advancement, we continue to manage our business and build our team. Here are few accomplishments for the quarter. We expanded our base new customers were up 30% sales. Our business development strategy gain momentum with partner channels also representing 30% of sales. We closed our largest hybrid deployment to date. We launched several new extensions of our Qx platform. Finally, Qumu received industry acknowledgement and our leadership in several noteworthy rankings. I will go over each of these in more detail later in the decision. Let me touch on a few financial highlights. Revenue for the quarter was $7.6 million and net EPS loss of $0.25 per share. A significant deal with the large financial companies through our AT&T partnership was delayed due to the customer testing requirements and we will close in the fourth quarter. The adjusted EBITDA loss was $857,000 for the quarter reflecting operational efficiencies as we continue to manage our finances. Gross margins 61.6% were impacted slightly by an increased percentage of sales through the channel. During the quarter, we signed 12 new accounts, including stellar names like Campbell’s, Pepperidge Farm, Ivey, Xvenia, French banking and financial service company Societe Generale, and Japanese Pharmaceutical, Sumitomo, [indiscernible], Mitsubishi Tanabe Pharma. Two of these new customers represented $1.5 million in annualized new bookings coming through our channel partnership with AT&T. The revenue mix was 76% for the U.S. region, 21% for the EMEA, and 3% for Asia-Pac. I am very pleased by the numbers in new customers in the variety of industries they represent. But we always had a strong reputation in financial services, chemical and communications companies these new customers demonstrating the peel of our products and our depth of video intense industries like pharmaceutical and food. The new customers are important wins of our land-and-expand strategy because I build on our base. Our blue-chip customers are loyal at 87% renewal rates and our customer satisfaction rates were at 98%. For expand, part of our strategy, 65% of our bookings came from existing customers and added to their deployments with capabilities such as unified communications, expanded video delivery and Qumu Cloud. As you know, we combined both cloud and on-premise technologies into one enterprise solution. We can provide hybrid deployments, Qx is not just best to both worlds. It’s the best for the real world. Large enterprise customers increasingly need both flexibilities for cloud with the reliability and security of on-premise solutions. Last quarter, we mentioned highly successful hybrid deployment with our customer AMD and alluded to other hybrid deals in the works. The new customer CIT is now deploying our largest hybrid installation to-date for a highly complex business case. Following on that success, we’re in the middle on another major deployment for a large financial institution. The installation complains three different video technologies into one Qumu pathfinder solution. This is the kind of flexibility through enterprise customers need. Now they can support of public CDN, peering and multitask all of seamless hybrid video delivery. It’s not just a matter of connectivity. We bring management and optimization across a holistic solution. Pathfinder is the only one single platform that allows and accomplishes. We are successfully transitioning more predictable Software as a Service model by remaining focused on large organizations globally, delivering both on-prem cloud and hybrids of video solutions. Qumu’s pipeline of viable significant sales opportunities remains strong at two times coverage. However, because of the mix of perpetual license versus SaaS deals, we ultimately determine where we land from a revenue perspective. We think it's prudent to reduce our guidance from $29.4 million to $30.4 million for revenue for the year. Next quarter we'll have our new CFO on Board to cover the financials. Today I'll mention a few key numbers and let you refer to the press release for more details and we can discuss in the Q&A at the end of my comments. Revenue of $7.6 million for the second quarter compared to $7.1 million in Q3 2016. Subscription, maintenance and support revenue for the third quarter 2017 was $5.1 million, compared to $5 million for the third quarter 2016. The variety of subscription, maintenance and support revenue primarily results from growth in the customer base as well as the timing of customer renewals. Gross margin for the third quarter 2017 was 61.6%, compared to 59.8% for the third quarter 2016. Gross margin for the nine months ended at September 30, 2017 was 62.8% compared to 56.9% for the nine months ending September, 2016. Total headcount was 120 as of September 30, 2017 compared to 119 as of June 30, 2017 and 152 as of September 30, 2016. Cash and marketable securities were $7.7 million as of September 30, 2017, compared to $9 million as of June 30, 2017, reflecting the third quarter operating loss and the impact on cash from changes in working capital. As stated in our press release, we have been negotiating with our lender Hale Capital Partners regarding the covenants and potential amendment or waiver of our credit agreement. These negotiations I believe have reached an agreement in principle early this morning with Hale Capital for the amendment to our credit agreement. The highlights of this agreement in the principle as follows; waiver of the potential October 31, 2017 covenant default as we described in our press release, reduction of percentage of cash in eligible covenant of 118% to 100% of outstanding obligations, elimination of the exclusion of eligible accounts receivable excluding relating large accounts receivable that were described in our earnings release. Reduction in core bookings covenants to $8 million for future periods. Change in repayment schedule to $3 million in principle due to $3 million principle will be due May 1, 2018. I am pleased to reach with this agreement in principle, there is still work left to be done in terms of becoming binding on us and on Hale. No amendment our waiver and credit agreement is by unless and until the parties execute and deliver the written agreement, a written agreement will affect our agreement in principle, needs to be drafted and reviewed and approved by parties. We expect that to occur in the next few business days. We will report if and when we enter into the written agreement in Hale. If we are not able to enter into a written agreement with Hale for any reason, we will also provide an update to reflect that. Again, we are pleased to have reached this agreement in principle with our partner Hale Capital. Now I'd like to review a few operational highlights as they relate to our market and product direction. Qumu remains focused on our two pronged strategy. Capitalized on our core strength, serving large enterprise with complex global video needs, build new partnerships in the video ecosystem, leveraging our Qx extensible platform. First, capitalizing on our core strength and serving large enterprises requires that we effectively energized our strategy in the market. Over the course of 2017, we increased our marketing in our partnership efforts. As a result, customers and prospects are seeing that we are no longer just a video streaming product provider. We are bringing a full suite of solutions. Qx, which flexes and scales with the direction. Qx is engaging the imagination and innovation of customers and opening up new conversations. Let me give an example, last month I visited dozen of our customers discussing Unified Communications plans. Every one of them have large Skype for Business installations. Skype for Business is replacing traditional video conferencing and phones. Our unique ability to let customers record, manage and broadcast these conversations at scale. Result in multiple trials and proof of concept projects will produce opportunities over the next three quarters. Our efforts are also scratching the attention of industry, catching the attention of the industry. We are in now larger discussion around social business, collaboration, Unified Communications. Qumu was honored among the top 20 collaboration technology solution providers of 2017, along companies like Cisco, Polycom and Slack. We are also named among 10 fastest growing Unified Communications Solution providers in 2017. And here is the ranking I'm most especially proud of. We are number one in Gartner's Group Peer Insights. These are voluntary in-depth review submitted by our customers. They are vigorously vetted by Gartner. To me it’s an important validation of our customer satisfaction score. It says a lot about Qumu, our commitment to enterprise customers are willing to go out on public record, discussing the quality of our platform and support. As I said, the second prong of our strategy is building new partnerships, leveraging our extensible platform with Qx. We built the right solution to provide digital dexterity to today's enterprise requirements. Open service-based architecture, this is what provides extensibility, meaning our products can easily integrate with other systems that large enterprises are implementing, systems like Mobile, Unified Communications, Social Portals, Digital Signage, IPTV. Along those lines, in Q3 we released two new extensions that were deployed by one of our partners. First, releasing a real time analytic. This provides viewership of both live and on-demand video intuitive graphical interface. Two large customers already deployed this feature as part of their enterprise video infrastructure. Second, an extension providing a fully integrated IPTV application, this certified extension deployed by a large financial institution lives, the streams of news and other market driven content to thousands of devices over their internal Pathfinder network. Our open service-based architecture also helps to add Qumu’s extensions. Our recent example of our Unified Communications gateway, this product already deployed in multiple clients, as I mentioned, continues to draw considerable interest as customers embrace Skype for Business and other UC solutions. Large enterprises are faced with a much challenge in consumerization of the enterprise and the consumerization of the enterprise continuous. Every element of transformation of Social Business, Unified Communication, virtual reality demanded more video. They need solutions that will scale not just bigger. The need for scale is maxim agility. Our platform because of it's both enterprise grade and highly extensible lets them do that. Gives large enterprises the flexibility they need to continue to move and adapt at their own pace. In summary, in Q3 we saw our Qx strategy take hold in the market, igniting customer interest, acknowledgment from industry in forms of highly favorable rankings. We attracted new customers, expanded our base with the full suite of solutions, on-prem, cloud and hybrid. We provide extensibility of our platform for our partners include developer extensions. And we maintained support of our large loyal customers. We are positioned in the market as large enterprises strive to increase what Gartner calls Digital IQ. Video play a huge role in the transformation and Qumu brings the platform to make it easy and manageable at enterprise scale. Now, let me open up the call for questions.

[Operator:]

[Operator Instructions] And our first question comes from the line of Mark Argento from Lake Street Capital. Your line is now open.

[Mark Argento:]

Hey, Vernon.

[Vernon Hanzlik:]

Hey, Mark.

[Mark Argento:]

I just wanted to drill down a little bit more on your partner strategy. It sounds like, you guys are seeing some nice results working with the guys at AT&T in terms of put together some or working with them to do some integrated solutions. Could you talk a little bit more about the pipeline with your partners and how you see that rolling out?

[Vernon Hanzlik:]

Yes. So I mean obviously, I've been talking about through most of the 2017. So I think that we've got partners in healthcare, obviously AT&T, as I mentioned, we've done some larger transactions with them and that pipeline continues to grow with them, also our partnership with our V-Cube in Japan. They continue to focus on our cloud product and they're making a lot of progress. We'll see more and more out of that in Q4 and as we look into 2018. But I think that we just started like two weeks ago where we have a free trial for our cloud product and we've got a lot of activity around that and we've seen partners coming in through that. We also have on the Unified Communications area other partner is using us for recording as we’re starting to roll that out and you'll see some announcements on that. And so that is probably the biggest draw that we've had is that people are seeing where they can use our cloud platform for recording these video conferencing and integrating as a solution set and starting to build on top of that. And then on the partners that are building things like our IPTV solution and real time analytics, those are solution sets that sit on top of our platform. They're leveraging our service-based architecture and we're going to see more and more on that side of it both in people just leveraging our platform from that perspective and will get into more vertical market. So it’s starting to really take hold and it’s starting to drive revenue for us which is very promising.

[Mark Argento:]

And then just turning to the balance sheet, I know you had mentioned in your prepared remarks that guys have agreed in principle with Hale in terms of the note. Is there a cost associated to that in terms of additional interest or shares or any type of compensation for the adjustments to the agreement?

[Vernon Hanzlik:]

We're still working through that Mark, but I think it will be kind of as stated, but I wouldn't want to comment on until we try to get the agreement written, but I think in principle it's what I stated, so we wouldn't have any – we had no additional cost on that, but I think that we're still working through some of those finer points.

[Mark Argento:]

Great. Thanks Vernon.

[Vernon Hanzlik:]

Thanks Mark.

[Operator:]

And our next question comes from the line of Jeff Van Rhee from Craig-Hallum. Your line is now open.

[Jeff Van Rhee:]

Great. Thanks. Hey Vernon.

[Vernon Hanzlik:]

Hey, Jeff.

[Jeff Van Rhee:]

So a couple for me. As you look obviously coming into Q4 you gave a sense of what we should be looking for from revenues and earnings. You've got a pretty good jump on Q4, you talked about that large transaction, the guys getting cautious around the quarter. Can you just talk about what you're seeing and not only incorporate Q4, but understanding you're not giving formal 2018, give us some sense of how we're going to get on a growth trajectory where the balance sheet is not the issue? You've obviously done a great job on costs, getting great reviews on the products, but numbers obviously got to go higher if you're getting out of this liquidity issues. So talk about two things there Q4 cautious guide and then some thoughts on 2018 if you would?

[Vernon Hanzlik:]

Yes. Well, let me address Q4 first because I think it's really the pipeline and the transactions that we're working on Jeff that we're bringing into. So it's the same mix that we usually have. We have our larger deals that we’re working on to close and those are proof of concept or they're actually – some of them are coming through significant partner that we're working on and we have some, our European group has a lot of those in the works. We also have just expansion in our base and then we have what I would call, our bread and butter on-prem opportunities and domestically. So it's a mix of a fair amount of cloud deals that we're getting. We've got some hybrid deals in there and we've got some large enterprise. So and it’s a solid proof of diversity in our focus market. So and it's just kind of get them all over the line and then it's the normal risk reward on that were some of these things are – we've been working on for quite a while and we're just kind of getting to what is the number going to be from a negotiation perspective. And as we look at 2018, Jeff, on the growth piece, I've been somewhat cautious and trying to give that where we want to be, I think last quarter, I said we're in this 8% to 12% growth as we look at it. As we see these partners start to take hold in these expansions that we can take to our base. That's where we're going to see more of a growth trajectory in 2018. I am still very cautiously optimistic as these things are starting to take hold. I will tell you that all of our platforms as we look at our Qx strategy and we break it down into the management piece of this, our Unified Coms piece is really starting to take hold and we got a lot a lot of interest in that as you heard me talk about the Skype for Business. But it's not just Skype for Business. It's any Unified Coms piece. And then our Pathfinder delivery stuff, I mentioned we're getting traction where people want to leverage that against how we're going to stand Pathfinder up in the cloud and that's going to be a revenue maker for us. And so we have these things that we can take advantage. Our partners will pull us in the areas and just take in, it will – which will drive opportunities for us in margin. In addition to things where our platform is getting more –where we're doing more mobile, we're doing more units. We're enabling conference rooms to be video, display rooms across and a lot of the financials have these were enabling stuff that they have been sitting dormant. Now they can say, okay, I can do a live event for many conference room and people really want to do that and that drives our Unified Coms piece. So the pieces that we can go back to our base will help us Jeff in addition to just expanding where we're marching down this road of collecting new customers with our land-and-expand and expanding now. So those things are all coming into play and I'm just I'm kind of still staying from a 2018 perspective in that 8% to 12% as we look at our opportunities at growth, so that we can get more or so. We're running this business in a – from a cash flow perspective and that's really what we're – that continues to be our focus and I think that we're making good progress on that.

[Jeff Van Rhee:]

Yes, okay. And then I guess just the follow-on there. You commented on some of the partner momentum that that's been building and it's really starting to lift it shut here and then you also touched on in the call part of the reason for the – slightly lower than expected gross margins was partners. How do you think about gross margins in general in particular kind of the puts and takes that partners take off? We see pressure on gross margin versus certain things could drive gross margin just in your thoughts along those lines?

[Vernon Hanzlik:]

No I think our margins will be fine, Jeff. The one that I comment it on was basically with some of the stuff that we've done with the IPTV solution in this financial institution. So we'll continue to work on where our core is because as you know I've been focused on the business less hardware more just software. The purity of our delivery for Cloud and Pathfinder will continue to increase our margin. So you'll continue to see what we've noted to people where we want to be in the higher, the mid-to-high 60s for this year and then as we move into 2018 we continue to push on that. So the partner piece is that we're working with them, so that we can enable them. But we're going to continue to kind of drive our margins and then they're adding value on top of that and we're providing it. And then the net of our software delivery to them will keep our margins to maintaining. Our main drive is to continue to move those up as enterprise software player, but that's kind of where we're at right now.

[Jeff Van Rhee:]

When you look at your competitive landscape and you're win rates, understanding it's a relatively small sample, but do you – have you sensed any meaningful shifts with respect to either a) win rates or b) who you're ultimately sort of the other finalist is that you're competing with on a quarter-to-quarter basis?

[Vernon Hanzlik:]

It's the normal suspects right now, Jeff I think that we will – the one that I mentioned, we're kind of unique in the perspective on these bigger enterprises where we're doing peering, we're doing Okuma integration, and we're doing a multicast network all through one Pathfinder delivery and nobody's doing that stuff. So we're seeing – the normal people that are inside the firewall, we're seeing them and people that are saying, they're inside the firewall really have to provide a delivery solution. And I think that on the cloud stuff it's the normal people that are in the clout, and I think when we do hybrid like the CIT opportunity, I think we have a very unique solution there and we’re going to continue to push on that competitively. But I would say it's still the four or five people that we normally compete within those areas, when we get to a strategy discussion with the right people whether it's a CIO who is in charge of digital delivery with video and they start to understand that you have to have both inside and outside the firewall and a robust delivery network integrated into your offering versus that it's two separate products or from two separate companies. That's where we're doing a much better job of how we're going to articulate that to these larger enterprises.

[Jeff Van Rhee:]

Okay. All right. Thank you.

[Vernon Hanzlik:]

Yes.

[Operator:]

[Operator Instructions] And our next question comes from the line of Neil Cataldi with Blueprint Capital. Your line is now open.

[Neil Cataldi:]

Hey Vernon. Any changes from your view high level on the video adoption trends. You guys starting to hear the phone ringing inbound or is there really still reliant on your sales team to go out there and make the sale initially?

[Vernon Hanzlik:]

I think that one comment I would say Neil on the phone ringing is that as we put up if you go to our website, we've got a free trial right now. We're seeing a lot of activity around that and we will be reporting that out as we turn those into real sales, so I think that provides an opportunity and the strategy was where our maturity in our cloud to provide that self service. So that's an area that we're – question really is how do you look at your growth piece? You want to see evidence on how those are converting. But I think on the larger enterprises, solutions side as it we're still driving through our sales team because these are more complicated sales on the enterprise side. And then on the cloud side, we're starting to close some of those where people are using it, they see the value, I mean when you're doing both live and video on-demand, you've got to handhold them a little bit. So it's a lower cost of sale, but we're still seeing that. We're trying to get that – more self-service and adoption. So I think that we'll see more than 2018 and well over the next two quarters. And then the Unified Coms piece, there's an area that we have to consult with the client to make sure they understand what they're trying to do. They have the problem like I mentioned on the Skype for Business stuff. But now as you articulate how they can take advantage of that and stream out of those interfaces to 600 people we've got to educate them on that. So there is some handholding and we're evangelizing through marketing and digital marketing and video to do those things, so that we can get more people on board. So that's kind of what's happening.

[Neil Cataldi:]

Okay. I guess what I'm trying to drill down into is. Are you seeing the CIO of these large enterprise companies starting to inflect in the way they look at video noticing that they need some sort of solution that you guys can solve that problem for them?

[Vernon Hanzlik:]

We are talking to more CIOs in the last six months than we have in the previous two years. I've personally sat with some CIOs with some large financial institutions. Actually the CIO name is changed to the digital information chief. GSK is one that we sat in front that videos becoming very progressive there. We are sitting down with large banks and they're saying, okay we've got to fix this video issue and I think that they're wanting to know more about it because our name and some of these customers like a Dow Chem or the Diamond Network or were VCTV I mean then that we’re actually these were named inside, not as Qumu but as a the platform and I think that's really what we're trying to raise. So to answer your question, we are get more in front of them is becoming more and I think I commented on the consumerization everything is going on outside in the consumer world the pressures are becoming more relevant for the CIOs and mobile is going to start to put pressure on these networks, more video is going to put more pressure on the network. So that they're kind of looking at this, we need to get proactive on this and I think we're starting to see more of that for sure.

[Neil Cataldi:]

Okay. And then similarly on the expansion orders, the customer list you guys have worked on for years now fantastic? What are you seeing from that base, I know you – I think you said that 65% of the quarter was from expansion are you seeing some of these companies want to move a little quicker now that they've already got even place and how do you think you can grow that as we move forward here given that the customer base is so strong?

[Vernon Hanzlik:]

I mean there's no doubt about as we've been engaging on this account base marketing for a while and its education. Making sure they're aware what we can do I think that's why I’m continued to educate everybody on this call and our Qx strategy because it's relevant to that question. The relevance is we can get very horizontal. We're offering to all our enterprise customers our cloud product they want, internal, external communication they're seeing the advantage of it they start to look at it. And I think that's where we'll see that acceleration it isn't. And I'd like to see more evidence of how the pace are going to invest Neil, but that's where we're going to see it out of our base and that's where we're going to win competitively in this market because of our broad solutions that we continue to talk about, where do they want to start? What's the most pragmatic area of whether it's corporate comps or its executive communication or it's just education inside these enterprises, we can provide a solution set with what we have is it with our major – with our components that we have. And that it resonates more. And then the examples that we have, so that that pace will run a little bit faster, but we just want to see more evidence of it in the pace of that we can communicate effectively on the financial side.

[Neil Cataldi:]

Okay. Last question you talked a lot in the past about your business strategy attacking the Fortune 1000, 2000 sort of base, but hearing you today it sounds like the partners are going to really sort of drive things forward next year and maybe beyond. I don't think you've talked too much about what that partner strategy is, and I know you've had some new hires recently. Is there – somebody there in place today that's really focusing on that or what might some of these other partners look like? And is that something from an investor perspective, we don't seem to get much news often, other than these quarterly costs? Do you think you're going to be able to start communicating partner activity better with the investor base?

[Vernon Hanzlik:]

Short answer is, yes. You'll see announcements that will come out in Q4 on partners. I mean obviously AT&T has been partner of ours for years. The one thing that I think is really important to note is our cloud product is very partner friendly. In addition to our on-premise depending on how they want to consume it. So we've got partners in place that are healthcare, communications and we're starting to see that activity, I mean I've talked about the V-Cube relationship. That's a classic partner that they're in $80 million business. They're very focused around video conferencing. They're leveraging our cloud platform in the Asia-Pac market. They're collecting new customers and we're starting to resonate that. So I think that you'll see more news coming out and you'll see the pace, I mean that's one of those inflection point piece that I want to see more evidence, John Poole, who is our VP of Business Development is focused on that everyday. We've got a strategy in place. We’re executing against that. We're seeing at – for me and for everybody that's on this call is evidence of the revenue that's doing that and then the different verticals that's happening because those are the types of partners a little add value for us for sure. And I think that's where we're staying very tight focused on that and making sure that we don't go out and get 50 partners because that's not going to drive that we will have partners that drive revenue that's relevant to the business in verticals that we're not going to chase and they're going to leverage our platform. And that that's in all different types of verticals, and that is one of our vertical strategies. If we build the platform that service base with all the things that they need, they'll build on that and we’ll take advantages, some of those that we've already got in financial or healthcare, areas that we think that are mindful for us to really kind of go after and own those markets and then leverage the partners and other ones.

[Neil Cataldi:]

Okay, thanks a lot. I’ll jump off now.

[Vernon Hanzlik:]

Okay, thanks Neil. End of Q&A

[Operator:]

Thank you. And at this time, I’m showing no further questions. Now let’s turn the call back over to Vernon for any closing remarks.

[Vernon Hanzlik:]

Thank you again for joining us today. Let me know if you have any questions and have a great day.

[Operator:]

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