Qumu Corporation
Q1 2016 Earnings Call Transcript

Published: 6 May 2016

[Operator:]

Welcome to the Qumu Corporation First Quarter 2016 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] As a reminder, this conference call is being recorded, May 4, 2016. I would now like to introduce your host for today's presentation, Mr. Vern Hanzlik, President and CEO of Qumu. Sir, please begin.

[Vern Hanzlik:]

Thank you, Howard. Good morning, everyone and thank you for joining us for our first quarter 2016 earnings conference call. Some of our comments today may also contain forward-looking statements, which are subject to risks, uncertainties and assumptions, should any of these materialize, or should our assumptions prove to be incorrect, actual company results could differ materially from these forward-looking statements. As description in our risks, uncertainties and assumptions and other factors could affect our financial results, and are included in our SEC filings, including our most recent reports on Form 10-K and Form 10-Q. During our call, we may offer additional metrics to provide future insight into our business and results. This detail may or may not be provided in the future. We may also reference certain unreleased services or features not yet available and we cannot guarantee the timing or availability of these services and features. So we recommend customers listening today make purchase decisions based on services or features currently available. With me today is Peter Goepfrich, our CFO. I will begin the call touching on a few quarterly financial highlights. Peter, then will provide some additional financial commentary. From there I’ll provide an operational highlights and comments of our market. After that, we will open the call up to questions. In the first quarter, strong execution and customer deployments and solid expense management enable us greatly to improve revenue and adjusted EBITDA on a year-over-year basis. We generated quarterly revenues of $8.7 million an increase of 46% compared to first quarter 2015. We continue to focus on strengthening our financial performance and growing the business with new and existing customers. Our 11 enterprise customers account for greater than $250,000 each in revenue. These enterprise customers represented in multiple industries; financial, technology, manufacturing and pharmaceutical. We had two transactions greater than $1 million in revenue for the quarter. Geographically the Americas and AMEA markets continue to show strong adoption for enterprise video. Our enterprise business performed well. The America market represented 68% of our revenue and the AMEA market was 30% of our revenue for the quarter. In APAC we continue to make progress developing our pipeline through our partnership with Fujitsu, CTC and other unified communication partners. APAC represented 2% of our revenue for the quarter. In the quarter we saw 18 larger enterprise implementations and upgrades to our latest release or expanded their video footprint. Additionally, in Q1 2016, our global renewal rates for maintenance and support, term contracts and SaaS contracts were greater than 90%. As I commented in the press release, we saw timing of several deals with new and existing customers push into the second half of the year, but we remain confident in our annual guidance as these deals remain in our future pipeline. For additional financial commentary, I'll turn the call over to Peter.

[Peter Goepfrich:]

Thank you, Vern. I'll comment on a few items not already addressed by Vern or included in our earnings release. As discussed last quarter, we changed what information is provided in our earnings release. The changes were made to increase transparency and provide information that we use to plan, monitor and evaluate our financial results. In regards to revenues, we continue to transition to more revenue that's recurring in nature. We've provided supplemental information for subscription, maintenance and support revenue. From a non-operating expense perspective, we've separated sales and marketing and general and administrative expenses for reporting purposes. As it relates to operating profitability, we've provided supplemental information for adjusted EBITDA, a non-GAAP measure. In addition to the new information we're providing, we're no longer specifically calling out total bookings because total bookings includes a variety of long-term items in nature and it does not reflect the mix of the underlying bookings. We believe the supplemental revenue information now provided as well as our quarterly and annual revenue guidance is more insightful and relevant to our performance. As we continue to refine and enhance our reporting, we may provide additional supplemental information in the future. Vern commented on revenue and I'll provide more context to gross margins. Software license and appliance gross margin was 51.2%, primarily driven by first quarter product mix, which included a higher percentage of hardware revenue and software license revenue compared to prior quarters. Service gross margin was 57.8%, primarily driven by improved economies of scale and increased service revenue as well as cost savings initiatives implemented in the second half of 2015. Total gross margins are expected to improve from the mid 50s early in the year to the mid to high 60s late in the year. Moving on to the balance sheet, cash and investments were $11.3 million as of March 31, 2016, compared to $13.3 million as of December 31, 2015. We'll continue to manage cash closely and we expect that we'll be cash flow breakeven in the second half of 2016. Deferred revenue was $11.1 sorry, $11.8 million as of March 31, 2016, compared to $12.6 million as of December 31, 2015. Excluding the impact of changes in foreign currency, deferred revenue decreased $756,000, primarily due to the timing of sales and the delivery of products and services. We expect that deferred revenue will increase the balance of the year. As noted in yesterday's press release, while we expect second quarter revenue to be consistent with first quarter 2016 revenue, we expect adjusted EBITDA to improve. Now back to Vern with additional operating highlights and comments on our market.

[Vern Hanzlik:]

Thank Peter. Let me review some key operational highlights and market comments and then we'll open up the call for questions. Our software platform's ability to address the video market both at the departmental level and the enterprise level is unique in our defined markets. We'll continue to focus on the Global 5000 industries verticals, such as financial services, pharmaceutical, manufacturing and other business verticals. At the enterprise level, we continue to have success with new customers with proof of concept engagements. We continue to win business because customers demand choice, control and completeness of solution that we can offer. Qumu has the largest internal video deployments and the most demanding customers. Our customer's needs for highly secured end-to-end video platform, plus an industrial grade broadcast network to deliver video and scale to audiences around the world, both for live and on-demand video communications. We continue to see used cases for video multiplying enhance our ability to enhance, to expand horizontally in our customer base. Some of our top used cases for our customers are executive communications, corporate training, social video portals, video blogging, sales training, customer service, employee on-boarding, digital marketing, unified communications, mobile evidence capturing, user generated content and ipTV. In Q1 we began to implement and account based marketing strategy. We expect to have a positive impact on out account acquisition and maximize our horizontal penetration to existing enterprise accounts in the future. The opportunity for us with large accounts is courtesy in the number of Qumu customers on the Forbes Global 2000 list, with the largest public companies. Qumu's customers represent about 4% of the top 2000 companies, 10% of the top 500 companies, 19% of the top 100 customers on the Forbes list. In the first quarter, the majority of our contracts were on premise transactions, both new and existing customers. However, we continue to see it trends towards our increasing percentage of cloud and hybrid deployments and our growing pipeline. In January, we conducted a two-day strategy meeting with 15 enterprise customers including several top 10 companies in multiple industries. We received uniformly positive feedback on our product roadmap from these customers, giving us additional confidence in our future technology plans. In 2016 we continue to advance our cloud and hybrid offering with the foundation of our next generation platform. The new software platform will expand our current capabilities, namely our customers to use video to enhance their work product even on a more broadly basis, every day, everywhere and any time. And as we've mentioned before, our hybrid deployments will continue to grow throughout 2016 and in Q2, we'll be deploying a new release combining Pathfinder with Qumu Cloud for a more robust delivery service for all new and existing cloud customers. Unified Communications is a key strategy for businesses to drive effective communication. Last quarter we announced a partnership with Pexip, that enhances Pexip next generation fusion video conferencing platform with an integrated recording function powered by Qumu. This combination gives customers the ability to communicate as a virtual enterprise and manager of video assets with an enterprise grade backing. We see a strong pipeline with new opportunities with this new partnership. We see this type of video communication management as a huge disrupter in Unified Communications market and continue to be excited about the collective opportunity. Another strategic partner is Citrix. In our customer base and in the broader enterprise market there are hundreds of thousands of VDI desktops that are not optimized for viewing video. Partnering with Citrix, we've built a unique video player framework leveraging our Pathfinder delivery network that delivers excellent video experience to VDI desktops, expanding the reach of video in large corporations. We'll be showcasing our Qumu VDI player at a National Show called Citrix Synergy 2016 at the end of May. Our VDI solution gives a tremendous competitive advantage and addresses a key communication challenge for our customers. As I've mentioned earlier, we had continued growth in some of our largest enterprise customers for the first quarter in financial, manufacturing and pharmaceutical verticals. One customer in the Americas is into financial services industry and continues to expand its footprint for delivery to all employees in the organization. In the pharmaceutical market, we had other customers in Germany and in the U.K. expand the foundation of video investment for more reach for live on-demand and other video used cases. In summary, we're in a strong position for growth in 2016, which is why we're maintaining our annual guidance. We continue to invest in the future with a mindful discipline of our product direction, a clear vision for our team and operational momentum to carry us into the second half of the year, well positioned to reach our corporate milestones and revenue growth objectives. Now I would like to open up the call for questions.

[Operator:]

[Operator Instructions] Our first question or comment comes from the line of Mark Argento from Lake Street Capital. Your line is open.

[Mark Argento:]

Hey, good morning, guys.

[Vern Hanzlik:]

Hey Mark.

[Mark Argento:]

Hey, could you talk a little bit about your visibility into the second half from some of these larger transactions, maybe talk about what is the -- what's causing some of the shift, the push-out of some of the larger deals? Is it feature-sets? Is it budgets? What's -- maybe you can provide some visibility or some thoughts around that?

[Vern Hanzlik:]

The clarity I can provide Mark is that some of them are proof of concepts and it's just timing of the transactions. The ones that we see in the pipeline right now as we look out through the year is not particularly feature sets, it's more timing for the customer and their budget cycles. And proof of concept sometimes run 60 to 90 days and it's just timing and negotiating with large organizations, just it becomes a timing issue. So we're being a little bit more prudent on the timing of when we would close them.

[Mark Argento:]

Sure. And then you mentioned I think you said you signed two seven figure deals in the quarter. Were those hybrids, on-prem? What type of deals were those?

[Vern Hanzlik:]

Well it was revenue that they were -- some of them were existing revenue that we took, but one of them is hybrid and then other one is just an expansion of an existing customer. The financial services industry continues to grow out their delivery network.

[Mark Argento:]

Got you. And then last for me, the sales, how big of a sales force are you running right now?

[Peter Goepfrich:]

Quota carrying is about 16, 17.

[Mark Argento:]

Is that where you see yourself got to running for the rest of the year?

[Peter Goepfrich:]

Typically somewhere in that range.

[Vern Hanzlik:]

Yes. The only switch we would see is if we continue to see an inflection point of something with the unified communication partnership in that building out those partners, but we want give more evidence to that.

[Mark Argento:]

One more and then I'll hop back in, but on the gross margin side, you guys are still looking to see a nice pick up in gross margins in the second half and that's really a function of you seeing more, that more software license bookings, is that what's driving their margin improvement in the second half?

[Vern Hanzlik:]

Yes. For the most part yes, software licenses will drive that margin up.

[Mark Argento:]

Great. That's it for me. Thanks guys.

[Vern Hanzlik:]

All right. Thanks Mark.

[Operator:]

Thank you. Our next question or comment comes from the line of Jeff VanRhee from Craig-Hallum. Your line is open.

[Jeff VanRhee:]

Got it. Hey there, guys. Thanks for taking the call. I guess Vern as it relates to the push-outs referenced, you saw few from Q4 that you call out sounding more than that in Q1, but notably it sounded like you're thinking those deals closed in the second half as opposed to Q2. Even with proof of concept 60 to 90 days, it sounds like there is maybe a little more in there. Can you just expand on why the not necessarily a one quarter, but it sounds like you're thinking rather than Q2 close as their second half closes. Just what's changed with the customer to drive that behavior?

[Vern Hanzlik:]

Yes, the ones that flowed out of Q1 into Q2 Jeff and then there is ones that we identified that were in Q2 that potentially push into Q3. So I think some of its market related. Some of it was just timing for these big customers that when we were able to get the deals done. Our sense of urgency versus theirs when we're dealing with these larger enterprises just even if they're exiting customers, it's a cycle. So I think that we have a clear visibility of what the pipeline is through the end of the year and we have deals identified that we're looking at that's kind of why we're sticking with the guidance that we have. And then kind of pushing these things as quickly as we can, I think that that's the one that we usually see in this enterprise sales cycle.

[Jeff VanRhee:]

The account-based marketing strategy maybe, you can expand on what that means?

[Vern Hanzlik:]

Yes, so what we've done Jeff is we've looked at what -- so I was stating those facts because of the amount of customers that we have in the Forbes 2000, but what we're doing as we get more horizontal in our bigger account base, we're getting more revenue as people understand the used cases that are broader perspective, which drives more revenue for us whether we're building out the network or we're going into different departments that they haven't even talked to us. So it's an awareness of a focus list within that Global 2000 and continuing to expand the video platform story and then how people should be using it because one department doesn’t know what the other department is using and I think that's really education around unified communications. All the used cases that are laid out and how they can take advantage of the platform whether that's departmental or enterprise.

[Jeff VanRhee:]

Could you quantify or give us a sense of pipeline build maybe thinking back six months ago and comparing what you see now, both in overall value as well as construction early stage, late stage deals or any other meaningful observations there?

[Vern Hanzlik:]

I think the one thing we're doing on pipeline as we bring new opportunities in, so we've got as I had mentioned on the unified communications, we have a list of somewhere in the neighborhood of 20 to 22 different types of opportunities within that relationship that we have with the Pexip Group. But that's one platform that we've done a really good job of integrating with and then the account piece is just deals that come in, RFPs that we're responding to, proof of concept. So I think that we're scrubbing the opportunities more diligently so that we can see what the conversion is and then the enterprise ones versus the departmental ones and whether they're on premise or cloud or hybrid doesn’t really matter, but it does dictate where we're selling to, whether it's IT or departmental form the size perspective. But I would say that the volume of the pipeline is where we've been. I would say that we're not at the three times coverage. We're more at a two times coverage and I think that's where we continue to think we can get more opportunities out of the base as we see in our revenue right now.

[Jeff VanRhee:]

I guess just lastly then along those lines, the account based marketing strategy, it sounds like you're trying to think about how to have drive better volume in the front end of that -- in the front end of that pipe in terms of just lead identification. Can you just talk about where the leads are coming from now. How you're sourcing them and maybe any incremental color on some of the steps you're changing or taking to meaningfully grow the quantity and scope, what's coming in the front end?

[Vern Hanzlik:]

Yes, I think that well we're using all of the latest techniques with digital marketing where we use Marketo internally. We drive campaigns based on these used cases. We are kind of scrubbing the list with inside of the accounts that are in this Global 2000. We target all the used cases and the people that would be around that and then the leads flow into there and then we quality them. They come into the pipeline. They get lead. We put them on to the reps if there is an existing customer or it's a new like we've got a proof of concept going on a very large opportunity that it's been going on beginning of Q1 and it flows into Q2 because of the POC started and it cuts of the cycle there. But I think for us right now it's just seeing how that account based marketing because we've had more of a broader brush with the lead Jeff and then we've come back to this as where our revenues coming out of our base and then also the types of accounts that are acquiring are broadcast quality network that they need to put in. People are starting to see that they need to have that which is really where we're focusing on that and that's where we see the biggest opportunity for where we're at as a company.

[Jeff VanRhee:]

Okay. And I guess just one last quick one, the cash certainly EBITDA you've made great strides on the cost controls and EBITDA in the past cash generation in the near term. How do you think about over the next two three quarters where we see cash bottomed, as for cash balances?

[Vern Hanzlik:]

Well we don't give a explicit cash number because of the timing of working capital, but if you use our EBITDA guidance gives you a reasonable proxy give or take to cash use. So for seeing at a number and looking at $2 million to $2.5 million because we're not extending out beyond that for second quarter guidance other than to say second half we're going to be cash flow positive. So you can take it from there, give or take that number. So somewhere south of $10 million, but not much.

[Jeff VanRhee:]

Yes, got it. Okay. Great. Thank you, guys.

[Vern Hanzlik:]

All right. Thanks Jeff.

[Operator:]

Thank you. Our next question or comment comes from the line of Glenn Mattson from Ladenburg Thalmann. Your line is open.

[Glenn Mattson:]

Yes, hi. Good morning. I jumped in a little late, so I might have missed if you've covered this already, please excuse me, but the competitive landscape, can you talk about who you're seeing when you go into accounts and is it usually multiple players and who is there and why you're winning or not winning in various circumstances?

[Vern Hanzlik:]

Yes, we didn't touch on it Glenn, but I'll give you the color. We see the normal competitors on the enterprise side, which would be [call] or a VBrick, but where we're winning are very high percentages when we're building a large delivery network that's end to end and highly secure and also redundant those types of things. That's what we're winning our business and those are usually at the proof of concept that I had mentioned before. So on the departmental side, it's a different level with our cloud products, so we see some of the boutique players and those transactions seem to be those are smaller. But I think we're seeing we -- see a little bit of call on the cloud side because they're pushing a lot of that and we don't see VBrick there very much and then you see some of the other players that have kind of drifted off into the online video portals and really we're just trying to expand that from a perspective of what we're doing with Unified Communications because we see that as a way to get a foundation of recording and then expand from there from a cost perspective.

[Glenn Mattson:]

And then how about pricing?

[Vern Hanzlik:]

At the enterprise level, our pricing is holding right now and on the cloud side we're competitive there. We're starting to see more traction as we get more features into our cloud and are sort of where we're going with that platform.

[Glenn Mattson:]

Okay. And then I realized it's very early and we're not talking about 2017 yet, but the sales force that as it exists now down in the mid teens is that enough to build continued momentum into 2017 plus the channel partners or we need to start adding people again at some point?

[Vern Hanzlik:]

We're going to be prudent about how we're adding them. We want to see how the channel takes off and where you allocate resources in order to build the alternative channel. That's one of the things we're keeping a close eye on and we've a lot of activity around that area. So we want to create more draft that way and keep our enterprise team focused on the larger transaction and more solution selling around video solutions as we get broader into this Global 2000.

[Glenn Mattson:]

Okay. What do you guys think and not to hold you to anything, but what would you say is the natural growth rate for this business right now? Maybe what the market is doing and what you're doing if you should be growing better that that or at the same rate or any color there on a long term?

[Vern Hanzlik:]

On a long term basis, I think that we're -- this market is somewhere between 15% and 25%. I think the wildcard Glenn as far as growth is where the Unified Communications and some of the things we're doing combine and does that create a different inflection point in different growth rate. We're seeing a lot of activity around that, but I want to have more evidence of where the changes on the growth rates are because there is market shifting and video is going to be growing dramatically inside of businesses and the management piece will start to see more of that. So I think that it's a wise scale in any of the analysts that we talk to about the market give it that range. It's somewhere between 15% to 25%. So I think that we -- that's where we see our growth rate based on what we've laid out to date and I think that we're looking for inflection point both from a global perspective because we're still -- our partnerships are just starting to produce some revenue out of the APAC and also in EMEA and you've got some economical things going on right now. But I think in general, that's where we see the growth rate right now which is until we see more evidence on these other sides with the Unified Communications being a wild card that creates wild accounts for us, but also then we can expand in those because our strategy with the UC guys is just an entry point and then we sell our enterprise platform beyond that.

[Glenn Mattson:]

Okay. Great. Thanks for the color.

[Operator:]

Thank you. [Operator Instructions] Our next question or comment comes from the line of Jason Revland from Blueprint Capital. Your line is open. Go ahead sir.

[Jason Revland:]

Yes. Good morning, everyone. Thanks for taking my question. My question is off the topic if you will relating to the minority holding you have in Briefcam, in monitoring this company it really appears to be quite a bit of momentum there and interest in the technology particularly in the contest of global terrorism. They also seem to be in a pretty good expansion mode just based on the job openings you can see on their website. So the two part question I have is can you remind us of your involvement your ownership position there. And two, maybe comment on whether this can be potentially monetized for cash at some point and then short and medium term, thanks?

[Vern Hanzlik:]

Thanks Jason. I think the original investment I think that the organization put in was about $3.3 million in capital. I think that we're -- I sit on the Board at Briefcam and we definitely are having some of those conversations. There is some interest of that business and their IP in the surveillance area, which is not a core focus for us, so that would be something that we would be looking to monetize at the right level. So we're definitely reviewing all those options in order to we're trying to build the business from around the video and then use that stuff inside of our products. So we would probably divest that if it made sense at the right time.

[Jason Revland:]

And just as a potential follow-up, do you have any sense of whether the valuation of that business has been expanding or contracting in the last year?

[Peter Goepfrich:]

We can't comment on it because it's private side company that we don't have the ability to do comment on publicly, but other than to say our asset on our books is covered by value. So we've got a $3.2 million asset on our books related to our investment and we're comfortable with that valuation.

[Jason Revland:]

Okay. I appreciate the detail. Thank you.

[Vern Hanzlik:]

Okay.

[Operator:]

Thank you. [Operator Instructions] I am showing no additional audio questions at this time. I would like to turn the conference back over to management for any closing remarks.

[Vern Hanzlik:]

Okay. Well I want to thank everybody for joining us today and if you have any follow-up questions, please contact us directly. Thank you.

[Operator:]

Ladies and gentlemen, thank you for your participating in today’s conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.