Qumu Corporation
Q1 2015 Earnings Call Transcript

Published: 9 May 2015

[Operator:]

Greetings, and welcome to the Qumu Corporation First Quarter 2015 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Mr. Doug Sherk, Thank you, sir. You may begin.

[Doug Sherk:]

Thank you, Adam. And good afternoon everyone. After the close of the market today, Qumu issued press release announcing its first quarter 2015 financial results. The release is available on the Company's corporate website at www.qumu.com. Before we get started, during the course of this conference call, the company will make forward-looking statements about its future plans, objectives, beliefs, expectations and prospects. For this purpose, any statements made today that are not statements of historical fact may be deemed to be forward-looking statements. These forward-looking statements are not guarantees of future actions, outcomes, results or performance. By their nature, these forward-looking statements are subject to many risks and uncertainties that could cause actual results to differ materially from the results discussed in or implied by the forward-looking statement. A discussion of the risks and uncertainties that affect Qumu's business is contained in the company's SEC filings, particularly under the heading Risk Factors, and in the press release issued this afternoon. Copies of these documents are available online from the SEC or on the Qumu website. These forward-looking statements are made only as of the date this conference call was initially held and the Company assumes no obligation and does not intend to update these forward-looking statements after the date of this conference call, whether as a result of new information, future events, developments, changes in assumptions or otherwise. And now, I would like to turn the call over to Sherman Black, CEO of Qumu.

[Sherman Black:]

Thank you, Doug. Good afternoon, everyone and thank you for joining our conference call. With me today is Jim Stewart, our Chief Financial Officer. This afternoon we announced our financial results for the first quarter. I'd like to review the highlights and some of our new churn challenges. Contracted commitment in a first quarter totaled $8.1 million compared with $14.3 million in a first quarter of 2014. Last year's commitments included a large order totaling $9.5 million from a single technology customer, excluding that transaction contract commitments were 69%. Driving our first quarter growth was strength in Qumu Enterprise in North America. New client commitments came from a diverse range of industries including automotive, financial services, forest products and one client from a public sector. Our customer base continues to value our solutions as was evidenced by a greater than 95% renewal rate on both Qumu Cloud return base customers and Qumu Enterprise maintenance customers. We also generated $3 million expense related booking at our existing clients' during the quarter. Revenue totaled $6 million in the first quarter, an increase of 52% from the prior year. We made substantial progress on our strategic plan to address the large and growing Qumu Cloud opportunity in North America and Asia Pacific. And we have expanded this product's pipeline considerably. We continue to innovate our products. During the first quarter we launched several product releases which advance our capabilities around user experience, social media, analytics and mobile. Lastly, our investments in technology partners and integration enabling our clients to realize the power of video in their existing enterprise fabric. Qumu's integration with Citrix VDI, Jive, SharePoint, Good Dynamics and most recently WebEx all are creating pipeline opportunities for 2015. While revenue grew to strong pace, the growth in contracted commitments was below our expectations for the quarter. We've identified two primary challenges that are constrained these growth and we've taken actions to address them. I'd like to spend the next few minutes discussing these issues and how we will regain the commitments growth that I know this company is capable of. Our first quarter contracted commitments in revenue contribution from EMEA were behind plan. Reflecting issues related to sales execution and demand generation. We've moved quickly to address the shortfall and get our EMEA sales execution back on track. In late March, we asked Peter Shutte to assume sales responsibility for the EMEA region in addition to his current responsibilities. During the last two years Peter has built out a sales and business development team in the Americas that has delivered most of our bookings. He has established best practices, scalable processes and culture of accountability. Peter has been tasked to mirror that in the EMEA region and drive collaboration targeting our multinational prospects and clients. He would be evaluating the sales and support team structure, regional assignments and core recovers ensures we are positioned to improve results. He will also be assessing the sales talent currently in place and will be adding sales and support staff who are appropriate. Recruiting is underway to replace the EMEA Sales Vice President who resigned in late April, and will be adding a western region Sales Vice President in North America to prevent Peter's efforts from becoming too diluted and ensure continued momentum in our highest producing region. In addition, in late Q1, we brought our EMEA demand generation in marketing activities in house. We will continue to build out their critical capability and feed the sales team with robust pipeline of opportunities. We also expect the Middle East to contribute to the EMEA region results in 2015. In the first quarter we closed our second transaction in Middle East and we see a pipeline of opportunities. We've established an office in Dubai and new sales reps started their last month. These actions should improve our close rate on significant EMEA deals as well as grow the region's pipeline to drive momentum for the remainder of 2015. We entered 2015 with expectations of closing several significant transactions from one of our key channel partners. However, these opportunities have been slow to develop and are unlikely to contribute to our 2015 results. In addition, it is taken longer than anticipated to establish our channel in Asia Pacific. As a result, we are refocusing our channel strategy on Qumu Cloud which has a less complicated and faster selling process. We are also evaluating potential partners in a unified communications market. On a positive note, in Asia Pacific, we are finalizing our relationship with our target partner while it's still in the very early days for Qumu Cloud in Asia Pacific we are already seeing developing pipeline with that channel prospect. While revenue growth was strong, this growth was also below our expectations for the quarter. The short fall in revenue affected our gross margin. We generated gross margin of 37% in the first quarter compared with 35% in the first quarter a year ago. Revenue in the quarter was insufficient to offset the increase in customer support and professional service investments that we made to support our expecting growth. These higher costs ahead of revenue growth resulted in a lower than anticipated gross margin. Looking ahead we remain confident that the market for video and the enterprise is strong and growing rapidly. More and more businesses are recognizing that video must be part of their enterprise fabric and their investments in video will continue to grow. Qumu is well positioned to capitalize on this growth. Whether a client wants a non premise deployment the convenience of the Cloud or a hybrid, we believe Qumu offers the best solution. Our products continue to be very well received by customers and highly ranked in comparison studies conducted by all the industry analysts. We are committed to improving our execution. We've taken steps to address the short falls in EMEA and the channel, but we will not see results over night. While we expect to see significantly improved results in the second half of the year, we've revised our outlook for the full year 2015. The company has now expecting annual revenue growth in 2015 to exceed 40% compared to 2014. With this adjusted revenue growth expectation, the company now expects gross margins to improve from 2014 and exceed 50% for all of 2015. Protecting our cash position is imperative for us and therefore given the lower outlook, we are aggressively assessing our hiring and spending plans for the year with the intention of still ending 2015 with greater than $20 million in cash and marketable securities. With that I'll now turn the call over to Jim for more in-depth look at the first quarter financial results. Jim?

[Jim Stewart:]

Thanks, Sherman. I'll begin with a brief review and some of the details behind key components of our income statement that Sherman has now already touched on. First quarter 2015 contracted commitments of $8.1 million were down 43% from last year's first quarter. As Sherman noted, excluding last year's key win from a large technology customer, commitments were up 69% from Q1 of 2014. Of our first quarter license bookings, 42% were perpetual contracts and 58% were term contracts. Revenue in the first quarter of 2015 was $6 million, up 52% from the first quarter of last year. This lower than expected revenue reflected a relatively conversion of first quarter contracted commitments in the first quarter revenue. Recurring term-contracts which include maintenance contracts represented approximately 62% of our total $8.1 million of contracted commitments in the first quarter. This is a higher mix of recurring contracts than we've had compared to recent prior quarters. As we've discussed before, our revenue will vary quarter-to-quarter based on the type of contract between Qumu and its customers. Actual contracts generally result in revenue recognized closer to the bookings state while term contracts result in most of the revenue and recognized rapidly over the period of contract. Moving down the income statement. The gross margin in the first quarter of 2015 was 37% compared with 35% in the first quarter last year. As Sherman discussed, the company still lacks scale to cover the investments made in customer support and professional services to support our growth and deploy backlog. Gross margin improvement has been slowed by these higher costs being expense ahead of reported revenue. As we see higher revenues in upcoming quarters, gross margin should improve considerably from this first quarter levels. Operating expenses in the first quarter 2015 were $12.2 million compared with $8.7 million in last year's first quarter. R&D expense in the first quarter 2015 was up $800,000 as compared to first quarter 2014 with the addition of Kulu Valley contributing $300,000 of this increase and the remainder reflecting higher R&D headcount and program spending. First quarter 2015 SG&A expense increased $2.7 million compared to last year's first quarter. This increase is primarily due to higher sales cost of $900,000 from increased sales headcount commissions, $700,000 due to the addition of Kulu Valley and $900,000 from one time charges related to transition and restructuring activities. The operating loss in the first quarter 2015 was $10 million compared with $7.3 million loss in the first quarter a year ago. Cash and marketable securities totaled $27.4 million at March 31, 2015 compared with $35.2 million at December 31, 2014, reflecting the first quarter operating loss and incentive payouts. Not included in the cash balance was $2.3 million in disc publishing sales proceed that are in escrow and are reported as restricted cash in our balance sheet as of March 31, 2015. This amount will remain as restricted cash until the escrow's release in October of 2015. Capital expenditures were approximately $200,000 in the first quarter of 2015. That concludes my remarks. Now I'll turn the call back to Sherman.

[Sherman Black:]

Thanks, Jim. Before I open the call to your questions, I want to reiterate our confidence in the enterprise video market and our confidence in Qumu solutions. I believe we have the actions underway that will address and improve our financial performance and these actions have our undivided focus. We are confident in our ability to execute and look forward to reporting to you on our continued progress. As a last note, I want to mention that Peter Goepfrich, our new CFO will be joining us on May 18th. We are very happy to brining on our Board our seasoned CFO with 15 years of executive experience with growing software companies, and I look forward introducing you to him. Jim will be available to support the transition through September 30. I'd like to once again thank Jim for his service and wish him all the best in his next endeavor. Now, operator would you open up the line for Q&A please.

[Operator:]

[Operator Instructions] Our first question comes from the line of Glenn Mattson with Ladenburg Thalmann. Please go ahead with your question.

[Glenn Mattson:]

Yes, hi, guys. Thanks for taking the question. Could you break out what Kulu Valley did for the quarter?

[Sherman Black:]

We are not breaking out Kulu Valley separately. I'll just reiterate what we said in our last call that Kulu Valley is expected to be accretive to our 2015 results or cash flow accretive to our 2015 results and we still expect that. We still have that same expectations.

[Glenn Mattson:]

Okay. I am just trying to figure out a little bit more about the weakness because I think from the commentary says it was mostly from Europe which to me -- makes me feel like it is from Kulu little bit but if Kulu is still on track, I think it did $5.5 million last year. I think the growth rate of Kulu is 40 plus or 50% and so if it is still doing that you are talking about -- if you net that out what your revenue guidance would be -- you are talking about very low growth for the enterprise business. So can you maybe help me figure out those pieces little better?

[Sherman Black:]

Yes. I guess when I mean we had issues in EMEA in both sides. I mean our commercial execution was far below where we expected it to be and we've taken really strong actions to address that. Our impact of Qumu Cloud in the Americas and Asia Pacific. We are not going to see that until the second half of the year nor did we expect to see it in Q1. We put in place in the last or now were made, we heard these guys the end of December and at January. We put in place sales reps who started marketing activities in those two regions in the Americas and APAC. And we -- I guess about $2 million pipeline just for this quarter that has been generated. I doubt we are not going to close all those deals but we will start to see EMEA and Asia Pac, I am sorry we will start to Americas and Asia Pac start to really generate. Most of what we did last quarter was in terms of new bookings were in fact the Qumu Enterprise business. If we look at the end of the year, we still have significant opportunities in both EMEA as well as in the Americas and we will see growth in that. But right now I think we are not breaking out the either of the two. I think the other problem we are going to have as we go forward, it is not a problem but this is how we are running the business. We are integrating the company. We've got the engineering teams working getting to a joint platform and in some cases you are going to have hybrid deals probably towards the back half of the year that are mix of the two product lines. And it is going to be -- that's part of line we are not breaking out the two.

[Glenn Mattson:]

Okay. And just on those several transactions from the channel partner that you now seem unlikely. I take those are enterprise and was that in one region of the world Europe or US and could you talk about why those kind of fell off the pipeline?

[Sherman Black:]

Yes. Well it is two -- it was actually two. There are two step challenges. The first one was we have one key partner that we were expecting to have a handful of multimillion dollar deals close in 2015. That was our plan coming into this year. Now it was on hills of very successful opportunity we closed that partner last year. And with that partner today, there is a handful of challenges we've run into I think number one we found in really difficult to move the needle for their sales team, meaning may get the attention that we need. And on top of that we found that when they would go into a deal, they would add pricing on top of the opportunity would put us at competitor disadvantage. And so we have had to a reset here and as I -- we did really a deep dive on the pipeline. And by the way that's difficult thing to do because there is separation between us and the end customer so it is harder to judge where you are coming out of the disappointing Q1 we did a really deep inspection of that pipeline. And I can't stand here today and say I see those multimillion dollar deals lined up to close in 2015. So that has an impact on the overall channel story and the overall performance for the year. The other element of that is what's happening Asia Pacific. We have a customer in Asia Pacific that we think can also become a very big channel opportunity for us. We expected to have that agreement assigned in Q1. We did not get assigned in Q1 and we are still working to get assigned and a positive front I expected to get close this quarter and we expect to be up and running with them. And then the other thing I would say about the Asia channel is that while we started with our Qumu Enterprise products over there, we think that bringing up the Cloud first might be the easiest way to go with that. In fact, there is already a significant pipeline building. With this channel partner, prospective channel partner, we expect to get the commercial range for some place later this quarter.

[Operator:]

Thank you. Our next question comes from the line of Mark Argento with Lake Street Capital. Please go ahead with your question.

[Mark Argento:]

Hey, guys. Just a follow up. So just to better understand the sale cycle. You don't think anything really changed in terms on the demand side of the equation in terms of the launch of some of your -- of the Kulu Valley product and integrating within other kind of existing foot print of your business.

[Sherman Black:]

So we are excited about the acquisition. I think it is going to be very strategic element of our company. We are --Mark, we are behind plan in EMEA and we got to address the commercial execution. By the way that fits on both sides. It fits on the enterprise side as well as the cloud side. And it was -- I will take hit for that, we just did not execute the way we should have and we are taking very deliberate actions. So it is still very there and I think the other thing that's been real positive for me is just the contributions of the Kulu Valley technical team that came over with the acquisition. As we continue to look out and think about how people are going to want to deploy video in this hybrid environment, I think this is going to be a fantastic combination of platforms.

[Mark Argento:]

Great. And in terms of competitive environment, are you seen any changes out there? Obviously video is becoming more and more popular but are you still comfortable where you are positioned from where you are seeing lot of the competition?

[Jim Stewart:]

Yes. I think so. There is always -- if you pull up of any of the analysts charts there are a dozen, 15 names on the chart. This market is a long way should beginning to consolidate. I think we've seen people especially the venture back guys, we know their out looking at raising funds or driving other strategic combinations. But from a product differentiation perspective I feel really strong. You talked about the channel. One of the things that we include as part of our channel effort and then what we tasked the team do as really work the technology partners. These are companies that resale our product but we've added a significant amount of differentiations around technology partners like Citrix and being able to deploy specially in the financial services area where there are heavy into the VDI utilization, providing them with video solutions with those Citrix terminals. Share point, we continue to not only on print but Office 365, we have continued to work with the MDM guys as well, good dynamic is a fantastic partner. And we've also recently announced new launches with both Cisco WebEx and also Jive, so here is talk about the enterprise fabric and that's what people want to do. They want to use video as standard piece content. And they don't want to have to go through special things to make video work. And by doing these investments, by doing these things we think that we well continues to push us forward. Then I think the other thing I would say about a differentiation is this hybrid play. You cannot under estimate this. We would love to be able to live in a world that's either on print 100% or in the cloud 100%. We have several competitors that are living in the cloud only. And I can tell you there are lots of companies that aren't ready to do that yet. And on top of that I think that video as a piece of content, there are several things that surface in the area of video delivery where having an on print portion of your solution is really going to make that video the delivery experience much better. So I feel good about that. And I would say more things, I would say about the market just along the lines of competitive development. This week the Microsoft at night conference they made a -- put a stake in ground of video is a big deal. And they announced guide to business and I think it is great market validation for it. And many, many things that are still unanswered. I am not sure what they are going to do for their on print customers as well as I think that when you start getting into large campuses, large office buildings where lot of people trying to hit this thing all once, I think it is going to be really challenge from a delivery perspective in a cloud only environment. And that's where we come in and we can really help their customers out and it has been big market for us and we continue go after the SharePoint space.

[Mark Argento:]

Great. And then just last question number -- current number of sales reps you guys have right now and how many of them have been with your company for a year or less? If you have that handy.

[Sherman Black:]

Yes. I will take a guess. And it's guess. Right now we've got 30 order carrying reps and then there are four people I would say don't have orders they are managing them. In terms of the tenure of those guys, the enterprise team probably from an enterprise side of that 30 about I guess 14 of those are enterprise. And probably of that 14 I would say less than 30% have been with us for less than year. Maybe it is 35% who have been with us for less than year. On the exact office on the cloud side and the account exactly and so we have to focus on selling this product. We've got 12 account executives worldwide with the majority of those in the Americas believe it or not. We got seven there and handful scattered across EMEA, APAC and the seven in the US, we have one -- it is got more than six months experience with the company. APAC brand new as well and EMEA, we are in a process of obviously looking at the execution there and we will probably -- we will bring out some new folks to join them.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from the line of Jeff Van Rhee of Craig-Hallum. Please go ahead with your question.

[Ryan:]

Hey, guys, this is Ryan on for Jeff this evening. Most of our questions have been answered or touched on. But I just had two other questions and ask real quick. One being on the peer-to-peer partnership you just announced with Hive Streaming. Can you just touch on that? How often is that feature are crucial and deal where you guys are in?

[Sherman Black:]

Well, it hasn't been that often and first of all maybe I explain everybody. First of all, Ryan thanks for joining. But what is about is, it is another delivery, now that we have four, five major delivery efforts or delivery methods that we offer our clients. And if you are in an environment that could be retail space where you got a very small pipe coming into your retail building or say it is a part of shopping mall in a larger retail environment, you got a very small pipe; you need to use different type of technology. The other thing that may drive you to considering peer-to-peer is if you have very limited IT resources on site. And you don't want to have a server, you want to run this on clients and if you are going to put something on the clients you need to do something in a very then client matter. And that's what driven us to do that. As you know we have a significant presence in the financial services business where they have several retail installations, thousands of them. These are branches that may have less than 10 or 20 people. And so something that we felt we needed to add into portfolio and I think it extends beyond there as well. As you know we also have a couple of other significant retail clients more in reselling of consumable goods. And they also have similar needs that we think this could be an advantage for. And so delivery is one of the areas that we lead in today and we wanted to maintain that leadership and that drove our partnership with Hive.

[Ryan:]

Understood. And then can you just update us on the separation from Rimage in last -- and you said there is 30 headcounts, I just wanted to make sure I got that number right.

[Sherman Black:]

Yes. 30 products carrying today

[Ryan:]

All right. And separation from Rimage with the back office, just going in the restructuring and everything.

[Sherman Black:]

So the separation from Rimage, the organization is fully completed separate. We do still share the SAP ERP system and we are still in the process of implementing our own ERP solution. We are going to be using next week. And we are making progress there and but we still got work left to do. So as we go through the rest of the year we will finish that --that total separation. [Operator Instructions] Thank you. Ladies and gentlemen, there are no further questions at this time. I'd like to turn the floor back over to management for closing remarks.

[Sherman Black:]

Thank you, operator. And thank you again everyone for joining our call. We are going to be coming back to you in early August with our second quarter results and appreciate you are tuning in then. We will you keep posted. Thank you very much.

[Operator:]

Thank you, ladies and gentlemen. This does conclude our teleconference for today. You may now disconnect your lines at this time. Thank you for your participation. And have a wonderful day.