Qumu Corporation
Q4 2017 Earnings Call Transcript

Published: 7 Mar 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to the Qumu Fourth 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. David Ristow, CFO. You may begin, sir.

[David Ristow:]

Good morning and thank you for joining our fourth 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 will now turn the call over to Vernon Hanzlik.

[Vernon Hanzlik:]

Thanks and welcome, I would like to make a few comments before Dave reviews the numbers for our year end and the fourth quarter. As I commented in our press release, we’re disappointed with our financial results of our Q4 and year end of 2017. Fourth quarter revenue was $7.2 million compared to 9.3 million in the fourth quarter of 2016. For full year 2017 revenue was $28.2 million compared to 31.7 million last year. Adjusted EBITDA was a negative $4.6 million compared to a negative adjusted EBITDA of 6.6 million last year. The strength in our cash position it goes a $10 million credit agreement with ESW Capital on 12th of this year, replacing the Company’s $8 million term loan credit agreement with the Hale Capital Partners. Our challenges were clearly in sale execution as a normal degree of customer churn and magnified by deals slipping into the next quarter. In addition, Qumu lost a recurring revenue from IBM a significant $3.2 million annual contract customers, which we have mentioned in previous call. But even with these disappointments, I look forward to 2018 both with excitement and pride and what we’ve accomplished so far and what we’ll accomplish going forward. First, we continue to maintain a loyal blue-chip global 2000 customers who seek Qumu as a trusted partner and are investing in our strategy because it fits with their organizations are headed. In addition, Qumu is currently the only solution provider providing in the industry offers a full range of deployment models encompassing cloud, on-premise and hybrid cloud. We have been investing to achieve this for years and are now able to address every company's enterprise video needs with the single full stack solution. We also support tools organizations already use for video creation with our intelligent NGS capability and can deliver content to almost any device used by the Company's workforce. I am also excited about the changes underway at Qumu, taking advantage of the opportunities we see in front us, we made significant changes in leadership specifically in sales, finance, business development. We've already been introduced to our Dave Ristow our new CFO who joined in November and making significant impact on our balance sheet, as I will discuss in a minute. Also are on the call our new EVP Worldwide Sales and Business Development, Chance Mason, a noted expert and visionary in our market. Along with these new leaders, our entire executive team has worked together with impressive speed and tenacity to develop and execute the plan for success that continues to align our expenses with the market opportunity. Our planned focus is on four strategic pillars for 2018. The first pillar is sales execution and new customer growth, we'll drive more opportunities to close efficiency effectively and quickly, Chance will lead this effort applying the direct experience and contacts in the enterprise video industry. From day one on the job, he has made immediate impacts helping position our full stack capability and uncovering new opportunities. Chance is overhauling the direct sales and channel operation and processes, under our new channel growth plan, we've identified the select group of committed resellers who are stepping up with business plans and provide their access to their customers and more RFPs. For example, one partner alone already identified 26 new prospects. Under Chance's guidance, we are changing the way we talk to our prospects and how we tell the story. In addition, we are looking beyond the global 2000 companies, focusing on innovative high end applications in a number of select verticals. As an example, we recently landed a regional health service organization as a perfect fit for Qumu with over 100 hospitals and clinics and more than 30,000 employees. This underscores the opportunity in select verticals that also is a great example of our land and expand strategy because customers is already seeing the use cases for video in other parts of the organization. The second pillar of our strategy is customer success and retention, keeping our existing customers happy and loyal is not the only top priority. It is the competitiveness for Qumu. Our third-party reviews verified by Gartner, which consistently among the top rate in the industry prove that. Part of the sales alignment efforts Chance is undertaking includes customer success teams. In addition to our active online community, we are also giving customers a form to collaborate with us in person. Over the next 16 weeks, we are holding annual customer summits in both the U.S. and Europe highlighting customers, prospects and partners who are innovative and leaders in their own industries through the use of video. The third pillar in our 2018, strategies, market focused product innovation. We invested two and half years in architecting a better solution that fits every customers needs, no matter what their deployment strategy is today. Those efforts crystallize last May when we launched our Qx enterprise video platform. Qx is designed with an open service-based architecture that makes it attractive for third-party developers to build extensions such as IPTV or real-time analytics. We now have the most extensible and scalable solution in the market. The x in Qx stands for convergence of key elements of a true enterprise grade video platform that no other competitor provides, making us the right solution for big or small applications. First, it's the only solution that works inside or outside the firewall and as a hybrid solution, providing best to both worlds, the flexibility of cloud combined with intelligent delivery technology. Second, our open partner friendly platform provides a single software solution end-to-end capture, delivery and management of video. In terms of video capture, our intelligent video NGS dynamically supports unlimited video content sources, including unified communications or videoconferencing such as Skype for business for WebEx. Intelligent delivery means the Qx adapt to the available network bandwidth and the end-user device for mobile to IPTV or virtual desktops. And finally, our platform provides secure content management video assets at scale with robust easy to use tool. With this new platform, our opportunities with new and existing customers are large and our point of entry in every new prospect is no larger dependent on either or approach. Our Qx solution meets the customer where their needs exist. For example, we can deploy on-premise internal for communications and in the cloud with external communication made all content as it should be as one the Qx way. The four pillars is strengthening our financials, during 2017 especially under the guidance of Dave, we’re showing up our balance sheet while investing in future. We secured a new credit facility that gives us more capital and less restrictive covenants. We also reduce our operating expense dramatically over the last year. These actions position us for future success in leveraging our platform capabilities and new leadership goes to work. Meanwhile 2017 included several significant successes. First, we landed 40 new customers. Qx has taken hold, resulting in major wins that demonstrated our plan directly in line with our customers. Many of these new customers are blue-chip names across the wide mix of industries including financial, tech, consumer, healthcare, manufacturing, including Heidi, SunTrust, Campbell's, CIT, Hitachi, British Telecom and the largest broadcasting company in Europe. Another success is our highly extensible partner friendly platform is igniting opportunities in our channel, as I mentioned earlier including significant wins with partners such as AT&T, British Telecom and Pinnacle. Next, we deployed multiple hybrid installations, hybrid solutions bring our special sauce, our intelligent delivery solution into the cloud environment making video in the cloud more secure and dependable and making on-prem more user-friendly. In addition, our unique approach to cloud is working, Qumu cloud is steadily growing component of our sales now representing half of our new customers particularly in APAC with our partner iStudy, a learning management system platform provider. Also during 2017, we stepped up our refocus on marketing effort to build on the momentum of our new product development efforts as well as our existing product offerings. Our new VP Marketing, Eric Rudolf, joined us in mid-year. Under his leadership, we dramatically improved the quality and quantity of our outbound and lead generation base marketing efforts with minimal additional spending. We've built strong relationships with five primary industry analysts who cover the enterprise space. We promoted several new features and capabilities. We developed more frequent and targeted marketing cadence including content marketing, direct marketing, social media, digital placement, media outreach, searching engine optimization and which has dramatically increased our digital footprint. I'm very excited to see the improvement pipeline as we increased our efficiency in capturing and managing leads during the second half of 2017. In 2018, we are steadily growing and refining our marketing programs and aggressively targeting five distinct vertical markets banking and finance, telecom and technology, manufacturing, service and consulting and biotech and healthcare space. There is no question that video is growing rapidly within today's enterprise. I'd like to highlight three recent customer wins that illustrate our advantage over the competition based on this growing need in large and leading enterprises. The first customer example is a giant computer memory technology company with a global footprint expanding in 18 countries. This was a competitive RP process which we won with our unique hybrid combination of cloud and intelligent delivery. We beat the competition by providing a multicast connectivity, the organization leading thousands of global different employees. Our solutions saved our client from having installed and managed plug-ins on 30,000 desktops and being left with noble support. With Qumu, all the intelligent routing happening in the Qumu network and our solutions supports all their mobile devices. The next customer I'd like to highlight is a multibillion dollar euro producer of crystalline and jewellery with 32,000 employees around the world, brought to us by our partner Dimension Data. The initial sale was cloud solution; however, the customers choose Qumu because of the hybrid capability and as already moving forward on plans to expand their Qumu solutions. This international branding and customer service powerhouse sees Qumu's Qx as their enterprise platform solution to multiple use cases including town hall meetings, product launches, product training, plus their all-hands event. The client is also a Microsoft shop which positions us well because of the strong integration from Microsoft applications such as Skype for business, SharePoint, Yammer and Outlook. The final customer example underscores our on-premise solution are still very big opportunities. Our partner AT&T brought us into a large U.S. banking institution for the assets over 200 billion and 24,000 employees distributed across 30 large jobs 1,400 branches. With this a massive workforce, the firm needs their ability to reach every employee with leadership broadcast events to drive employment engagement and knowledge transfer. Like most large financial institutions, they have complex environments in the high security requirements, as a result the sales cycle two years in this case was very involved requiring extensive customer education, months of planning, a significant proof of concept work only Qumu was able to provide three distinct delivery technologies acquired with one solution, despite the long sales cycle our team achieved installation in just 90 days. In summary, Qumu's underlying driving the convergence in the enterprise video world. We are converging cloud and on-prem input and delivery, streaming and on demand video, this is why Qumu is the future for enterprise video. Now for financial commentary, I will turn the call over to Dave and then I'll come back and review some strategies and market comments before we open up for questions.

[David Ristow:]

Thank you, Vern. I will comment on a few additional items related to our financial results and provide guidance for 2018. Total revenue was 7.2 million for the fourth quarter compared to 7.6 million last quarter. Software license and appliance revenue was 2.0 million for the fourth quarter compared to 1.8 million last quarter. The increase in software license and appliance revenue was primarily due to the increased software license sales. Subscription, maintenance and support revenue was 4.3 million for the fourth quarter compared to 5.1 million last quarter. The decrease is attributable to the significant customer loss shared by Vern earlier. Professional services and other revenue was 905,000 for the fourth quarter compared to 638,000 last quarter. In 2018, 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 the subscription, maintenance and support revenue will grow steadily from a quarterly base of approximately 4.0 million at the end of 2017. Gross margin was 65.7% for the fourth quarter compared to 61.6% last quarter. Moving on to operating expenses and adjusted EBITDA, a non-GAAP measure. We’ll continue to right size our expense structure with which results -- which resulted in significantly improved operating results in adjusted EBITDA. Compared to the corresponding period last year total operating expenses decreased 8% and 13% for the three and 12 months ended December 31, 2017, respectively. Due to the timing and mix of large on-premises sales, although adjusted EBITDA decreased 1.6 million for the three months ended December 31, 2017, adjusted EBITDA improved 2.0 million for the year ended December 31, 2017. Moving on to our balance sheet, cash and investments were 7.7 million as of both December 31, 2017 and September 30, 2017, reflecting fourth quarter operating losses and the impact of cash and changes in working capital. As Vern had mentioned to strengthen our cash position, we closed a $10 million credit agreement with ESW Capital on January 12th of this year, which replaced the Company's $8 million term loan credit agreement with Hale Capital Partners. As a result, net loss per diluted share for the fourth quarter and full year 2017 reflects a $1.5 million or $0.16 per diluted share of interest expense for the incremental amortization of deferred financing costs related to the loan modification. I also want to take a moment to mention the very positive results from our $3.1 million investment in BriefCam. For those of you new to the call, BriefCam is a privately held Israeli company developing technology for reviewing and analyzing the video captured by security and surveillance systems. The Company reported adding 119 new customers in 2017 and grew revenue by 100% year-over-year. We like BriefCam's traction. Before I go into guidance I'd like to speak briefly about our business model, the impact of 606, and our approach to guidance going forward. Our Qx strategy is resonating with markets. We're the only company in the marketplace able to deploy holistically in any enterprise with our Qx platform. Within Qx, we saw three deal types, cloud, hybrid and on-premises. The on-premises offering tense to be large purchases sold as perpetual licenses, these sales cycles are long and the decision making and contracting processes involve many parties which make them difficult to predict from a timing perspective. This reality contribute both are lumpy and often unpredictable revenue. Therefore, in order to better align shareholder expectations with the realities of our business model of the best interest of our long-term growth plans we will only be providing annual guidance moving forward. Our goal is to continue to deliver transparency into our operations and financial results and as a business and as a leadership team we’re absolutely committed to delivering again this year's annual guidance. Let me touch on ASC 606 impacting our guidance for 2018 is the new revenue recognition standard under ASC 606-2018 revenue will be reduced by approximately $1.1 million or 4% of our 2017, revenues. This relates to the treatment of previously booked term licensing arrangements. We do not presently anticipate a material impact under ASC 340 relating to commission expenses. Our 2018, guidance and our 10-K filing reflect these changes. Moving on to guidance revenue for the year 2018 is estimated to be approximately $25 million. The revenue guidance is below prior year results because of two significant factors. As previously noted, we lost a significant customer with an annual contract value of $3.2 million plus the $1.1 million, negatively impacting the 2018 results are resulting from the adoption of the new revenue recognition standard ASC 606. Total gross margin is expected to be in the mid to high 60s for 2018, we expect core bookings to grow approximately 25% emphasizing growth in sales of the Qx platform. Adjusted EBITDA loss is expected to be approximately $3.5 million for the year. Our objective is to achieve positive adjusted EBITDA in the second half of the year through cost savings in initiatives that are smartly deployed to support the four pillars growth plan that Vern communicated earlier. Vern, back to you.

[Vernon Hanzlik:]

Thanks, Jeff. Qumu’s opportunity in helping customers conversion their complex video environments into one intelligent platform that brings an outstanding, dependable security user experience to thousands of employees, we are now the only solution provider in the industry that offers a full stack of deployments model of cloud, hybrid and on-premise under the Qx enterprise video platform. We are capitalizing on that position focus on four filler strategic pillars for 2018, sales execution, customer success and retention, market focused product innovation and strengthening our financials. We are moving into 2018 with several major competitive strengths of loyal unmatched blue-chip customer base. Our proven product strategy and platform is in line with the customers need today and in the future. Our strong marketing program behind it a new season leadership team is already making substantial impact on our financial stability and business development and finally, we have implemented a plan to set the business rightfully take full advantage of these advantages and strengths. Now, we will open the call for questions.

[Operator:]

[Operator Instructions] Our first question comes from Jeff Van Rhee with Craig-Hallum.

[Jeff Van Rhee:]

First of all 2017 bookings, what was the actual bookings growth for 2017?

[Vernon Hanzlik:]

Year-over-year, Jeff, it's about 10% for 2016 and 2017.

[Jeff Van Rhee:]

Okay, and then given the post-Qumu I think back in '15 we are running about 4 million subscription, it sounds like that's what the guide is for a base line in Q1 of '18. The signings between here and there you've had steady lumpy, but some certainly had some signings. Talk about the churn outside this IBM customer loss, what's the churn rate then?

[David Ristow:]

Jeff, this is Dave. Normal ordinary churn within the cloud business, I would suggest is on track with what our expectations are. We did have in the fourth quarter of 2017 some additional churn that was beyond normal expectations for our on-premises business. We see those as a really one-time event and we are able to tie those back really to customer who are on legacy versions of this offer and hadn’t migrated. Going into 2018 as part of our customer success initiatives, we've going to adding and target each and every one of those customers on legacy platform and had already got commitments to upgrade the vast majority of those today, which we believe will go ahead and eliminate and/or significantly minimize any churn coming out on-premises side of the business. And with the QX platform as it's now deployed, what we're also finding as unique opportunities for us to broaden the footprint as we have this discussions because as we look at essentially a customer who is on-perm but maybe haven't upgraded, we're finding opportunities to go ahead and move into marcom or even human resources and deploy the cloud base technology hand-in-hand with the upgrade strategy. So what we suffered in Q4, we're actually seeing as an opportunity going into 2018.

[Vernon Hanzlik:]

Jeff, just to add to that is some of the stuff on the churn just if we focus on the cloud for a minute is today's point is, was normal churn. I think the other thing is, those are probably older, what we call the Qumu Valley acquisition and those people didn't were going to transition to the new and there is smaller transactions. So today's point some of the on-premise stuff that we saw in Q4, which obviously were focused on those types of things. But I would say that it's normal and we're adding -- as we mentioned, we're adding more cloud customers. There is smaller ASPs, but their customers are going to grow and like the example I gave with large company in Europe.

[Jeff Van Rhee:]

And then on the EBITDA, just the clarification in the call I think makes some script referenced second half EBITDA profit. And the release said that you'll achieve it's positive adjusted EBITDA in Q4. So to reconcile those, is that just saying in Q4 is the point where you go EBITDA positive and the combination of Q3 and Q4 will also be positive? Is that the reconciliation of those two comments?

[Vernon Hanzlik:]

Yes, so Jeff to go ahead and toe that line so from a conservatism standpoint, Q4 is what we've built into the release, really it comes back to what we're talking about as it relates to the lumpiness of the business. There's an entire possibility this gets pulled into Q3, but it will be like Q3, Q4 where we see this is a certainty and therefore that's the reason for the script difference from that of the release.

[Jeff Van Rhee:]

And what's the expectation on that timeline then in terms of cash usage between your and their?

[Vernon Hanzlik:]

So, from where we are at landing positions '17 to effectively we’ll wrap probably about 4 million and absolute burn.

[Jeff Van Rhee:]

And then just last one from me then the guide for '18 looks like the initial swing here is 25% bookings growth. Talk to me about the -- how you came to that conclusion specifically within -- with respect to the underlying assumptions, mainly does it sort of assume similar close rates to everything you saw in '17? How does the growth play out? Is it just the function of a much larger pipe right now? How much of that can you see versus what you could see coming in the '17? Just give us a sense of your conviction and visibility to that 25% and how you get there?

[David Ristow:]

Yes, I think the key there is one it's the pipeline, Jeff. I think the second is some of the energy we're getting out of some of these partners, which are starting to take hold, which I commented on, the size of the pipe and then just where they are in the maturity of the pipeline. As we've seen things slip so that kind of gives us the conviction on the growth piece. And I think that it's, I think that we've set the bar where we can exceed some but I think it's in this industry right now a year-over-year of double digit growth is kind of where we see the right thing but it's just the opportunities we're seeing with the global footprint.

[Operator:]

Our next question comes from Glenn Mattson with Ladenburg Thalmann.

[Glenn Mattson:]

The IBM relationship you referenced earlier, do you have any sense for how they're doing now that they've used their in-house solution and perhaps maybe any chance to win that business back over the medium term?

[David Ristow:]

Yes, we actually don’t' know Glenn specifically on how -- I mean I think that there's some promotion around what they're doing there. I think that we are not counting on that business coming back, there might be some opportunities but we just -- we are moving ahead, IBM went out and invested a lot of dollars competitively to get into this space, they've bought multiple companies. So, we are focused on competitive landscape with IBM, just more of a competitive thing, we are not seeing in the space that we are I mean they're definitely marketing to that, but we are seeing them be successful there at this point other then the basing out.

[Glenn Mattson:]

You mentioned BriefCam, how well they are doing. Is there an opportunity to monetize that asset, that's becoming more relevant at this point? And can you give a sense for what you said when you carried on the books forward? Can you give a sense for what do you think perhaps that assets were?

[Vernon Hanzlik:]

It's kind of -- well, I mean we can't disclose that. I think what to Dave's comments on that, we -- the IP that we invested in a little bit over six years ago is starting to take hold. You can see it in some of their just their press releases that they're doing. We -- the intrinsic value what we have in books as far as how we would monetize that, we see that -- potentially as they get more success, there will be more opportunities to do that. And I think patients are going to pay off on this just because they are having our great deal of success of people acquiring the technology and selling it so. I think that they are going to be in a good position and it make sense for us as we stated before that opportunity comes, we would monetize that.

[Glenn Mattson:]

Two other question ones, the CapEx has been significantly later in the last two year and used to run like million dollars and now you’re running several hundred thousand or something. Is that sustainable to level down here is that what you expect for ’18?

[Vernon Hanzlik:]

I think it comes down to two things fundamentally we've been rationalizing essentially the platform in the cloud and as a result haven't been doing a lot of this in-house which, if you go back couple years a lot of that CapEx is tied to initiating getting cloud launch prior to us moving the technology up in the cloud. The second component that is within our plans we do have some technology refresh CapEx plan for the second half of this year, which will be deployed based on our ability to deliver plan, but it is rationalized with the plan.

[Glenn Mattson:]

Last just, what do you expect interest expense to be this year.

[Vernon Hanzlik:]

We’re looking at approximately 1.6 million.

[Operator:]

[Operation Instructions] And I’m not showing any further questions at this time, I will turn the call back over to Vernon,

[Vernon Hanzlik:]

Thank you again for joining us today. If you have any follow up question, please feel free to give us a call and contact us directly. Have a great day.

[Operator:]

Ladies and gentlemen that concludes today’s presentation. You may now disconnect and have a wonderful day.