Qumu Corporation
Q2 2015 Earnings Call Transcript

Published: 8 Aug 2015

[Operator:]

Good day and welcome to the Qumu Second Quarter 2015 Conference Call. Today's conference is being recorded. During today's presentation, all parties will be in a listen-only mode and we will conduct a question-and-answer session at the end of the presentation. At this time, I would like to turn the conference over to Doug Sherk. Please go ahead sir.

[Doug Sherk:]

Thank you, Jenifer and good afternoon, everyone. After the close of the market today, Qumu issued a press release announcing its second 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 and assumptions or otherwise. And now, I would like to turn the call over to Sherman Black, CEO of Qumu.

[Sherman Black:]

Thank you, Doug and thanks everybody for joining us today on our second quarter 2015 earnings call. With me today is Peter Goepfrich, our recently appointed Chief Financial Officer. Peter joined us in May and has been quickly getting up to speed. He has already made significant contributions and is actively engaged in improvements to our financial processes and modeling as well as helping us drive focus on critical company initiatives. We look forward to his contributions going forward. Also our other senior leader, Vern Hanzlik our President is with us today and he will participate in the Q&A that will follow our remarks. I'll begin today with an overview of the financial and operational highlights of the second quarter and provide an update on our outlook for 2015. Peter will offer a more detailed look at the second quarter results. Then we will open up the call for your questions. There were some very positive developments in the second quarter that demonstrate the progress we're making to address the challenges that we noted in our first quarter conference call. We generated record quarterly revenue of $8.8 million in the recent second quarter. This surpassed the previous record of $8.4 million reported in the second quarter of 2014. Last year, second quarter revenue included a significant contribution from a single large customer. Excluding that contribution, revenue was up 46% over last year. More importantly the second quarter revenue reflected an increase of 47% above revenue in the first quarter of 2015. Driving the revenue growth were better results from Europe and continued success in the Americas with the Global 2000 market where we added new customers and expanded our business within our existing client base. Contracted commitment in the second quarter totaled $8.3 million an increase of 12% from $7.4 million in the second quarter of 2014. The increase reflected several new customers from a range of industries including financial services, heavy industry, creative services and non-profits. Our gross margin in the second quarter was 49% compared with 37% in the first quarter of 2015. The increase reflects the strong quarter-over-quarter growth in revenue that allowed us to better leverage the investments we made in customer support and services. These improved financial metrics reflect progress we made on our operations during the quarter. On our first quarter call, we highlighted execution challenges in EMEA. The new Leadership Team there has been actively pursuing enhanced sales and marketing efforts and reassessing our priorities and resources. During the quarter we had a significant customer win in the region at one of the world's ten largest pharmaceutical companies. Also in July, Paul Herdman joined us to lead our sales effort in EMEA. I am confident that these changes along with our maturing pipeline of opportunities will result in significantly improved results in the second half of the year. The North American market continues to show strong adoption of enterprise video and on the strength of our products, our enterprise business performed very well in the region. One of our North American wins for the quarter is a Fortune 100 diversified insurer. They have tens of thousands of employees and hundreds of offices distributed around the world. Like many businesses they've invested in an inside the firewall social media platform to maximize employee engagement and collaboration. That platform is enabled to support video as a key component. At this customer, we're not only enabling that existing social platform with video capability but we're also replacing a competitor and building out a private video broadcast network. In Japan, we entered into an important sales partnership with Fujitsu, one of the top five IT service providers in the world and the number one IT service providers in Japan. The brand strength of Fujitsu will certainly advance our efforts in this region. In Australia we had our first win and it was at one of the countries big four banks. That win based on our Qumu Cloud platform stages a significant expansion opportunity as well as a landmark win in the financial sector in Australia. Our customers initial used case will be for external broadcast of institutional research reports. Over the next several quarters, we expect a half dozen other operating groups within that bank to come on board with our platform. This is a great example of our expense sales strategy that Qumu Cloud has enabled. In addition to progress on our sales efforts, there were several important product highlights in the second quarter. We were recognized once again by an industry analyst for our product and technology leadership. Aragon Research, a technology focused research and advisory firm name Qumu the leader in their recent report, the Aragon Research Globe for Video Content Management. Our R&D investments resulted in some significant new product introductions and technology partnerships. I would like to highlight a few of those for you. Delivering high performance video to virtual desktop infrastructures has long been a difficulty for organizations. Qumu has developed a solution for this challenge with the video optimization path for Citrix by providing integrations with the latest Citrix VDI and XenApp Infrastructures. This will enable endpoints under management to request and play high quality streaming video. Mobility remains a key objective with all enterprises. Mobile video security and functionality are a key differentiator for our offering. During the quarter, we launched a new version of our Qumu Enterprise mobile app and on the Qumu Cloud platform we launched our IOS in Android mobile apps. Also our Qumu enterprise platform is now integrating with another leading mobile device management platform XenMobile Enterprise Mobility Management from Citrix. These releases along with our other mobile device management integrations provide our customers the broadest capability of enterprise secure mobile video. As you know, last year we acquired Kulu Valley and have been aggressively advancing our cloud offerings and capabilities. We believe that flexible hybrid deployment solutions will continue to gain momentum in the market. Last quarter we took a couple of steps forward in aligning to that trend. We now offer cross publishing capability from Qumu Enterprise to Qumu Cloud. We also deployed our cloud offerings on IBMs cloud soft layer infrastructure, which will provide us with improved performance, flexibility and world-wide reach. Qumu has been recognized many times for the breadth of our video delivery technology leadership. During the quarter, we were proud to announce receipt of a U.S. batch for our secured content delivery technology that provides a policy based secured download delivery alternative perfect for mobile devices. During the quarter, we further expanded our vide delivery capabilities by introducing live transform, a dynamic streaming capability. As stated earlier we see a significant market opportunity in Japan and we're pleased to be partnering with Fujitsu. In support of that opportunity we've completed the Japanese localization for Qumu Cloud. Finally in our drive to make Qumu an enterprise standard for video content management delivery, we introduced several key integrations. Qumu now offers an app for Microsoft Office 365, providing a true solution for that environment. We've also focused on the growing video opportunity within unified communications through two new offerings, a WebEx Integration, which enables archive, speech search and rebroadcast of those webcast and a unified communications gateway, which can injest from video conferencing endpoints and stream video to any device in an organization. It was a very productive quarter from an operational standpoint and has positioned us well for continued improvement throughout the remainder of the year. During the second half of 2015, the company expects increased revenue growth compared with the first half of the year. Factors in this growth include improved leadership and execution in Europe, the continued strength of Qumu Enterprise in the Americas, the consummation of a reseller agreement with a leading Asia Pacific channel partner and a strong second half pipeline. We continue to expect 2015 annual revenue growth to exceed 40% compared to 2014. We continue to expect gross margins will exceed 50% for all of 2015. During the first half of the year, our cash consumption exceeded our plans. To support our goal to be cash flow breakeven by the end of 2016, we're in the midst of a comprehensive operational review and have begun implementing cost reduction measures to consolidate and better focus our resources. These expense reductions are coming from all areas of the company including headcount, contractors and vendors. Through increased revenue and cost reductions, we anticipate that we will reduce the cash burn from operation by at least 50% in the second half of the year compared with the first half and we expect in 2015 with cash and marketable securities of approximately $15 million. With that, I'll now turn the call over to Peter for more details on the second quarter financial results. Peter?

[Peter Goepfrich:]

Thank you, Sherman. Good afternoon. My comments will be brief and I'll touch on a few key highlights from our second quarter financial performance. Second quarter 2015 contracted commitments were $8.3 million, 12% growth from the second quarter last year. Recurring term-contracts which include maintenance and support contracts, represent approximately 45% of our contracted commitments in the second quarter of 2015. As noted in the past, revenue will vary quarter-to-quarter based on the type of contract between Qumu and its customers. Perpetual contracts generally result in revenue recognized closer to the booking date while term contracts result in the majority of revenue being recognized ratably over the contract period. Gross margin in the second quarter 2015 was 49% compared with 50% in the second quarter last year and much improved from 37% in the first quarter 2015. Gross margin will continue to improve as we generate additional revenue, improve our product mix to higher gross margin offerings and gain more economies of scale in our existing cost structure. Moving on to operating expenses, R&D expense increased approximately $600,000 compared to the second quarter last year. SG&A expense increased approximately $900,000 compared to the second quarter last year. The increase in these expenses was primarily due to increase headcount through the acquisition of Kulu Valley in October 2014 and increased contractors and headcount in R&D and SG&A over the past three quarters. I'll close by reiterating Sherman's comments. Through increased revenue and cost reductions, we anticipate that we will reduce cash burn from operations by at least 50% in the second half of the year compared to the first half and we expect to end 2015 with cash and marketable securities of approximately $50 million. Now operator would you open the line to Q&A.

[Operator:]

[Operator Instructions] We'll take our first question from Glenn Mattson with Ladenburg Thalmann.

[Glenn Mattson:]

Hi a couple, I guess first on the Fujitsu partnership I guess first I'll say congratulation on the revenue growth in getting the business back on track a little bit, on the Fujitsu partnership, can you tell me how do you kind of ensure that your priority for them, you're a small vendor and they're such a large key provide as you mentioned. Can you talk about how important this partnership is to them?

[Sherman Black:]

Yes Glenn, first of all thank you and thanks for joining the call. I think that's a fair question and something that we've been challenged with. We have I think number one I would say, they're a customer. So that's how we started this relationship was by -- they started using the product. They recognized that it has a significant connection to not only their services business, but also the infrastructure that they sell and they also have a very large infrastructure business. Video as you know, does drive a lot of not only service, but also infrastructure. Basically the value proposition they see a significant match with their client base and I don't believe there is any one in Japan that's offering a solution for them. And we see Glenn this opportunity going beyond Japan. We think there is easily an opportunity in Southeast Asia as well as perhaps even into Europe.

[Glenn Mattson:]

Okay. Great. And then could you go into a little more detail on the cost cutting plans? What areas specifically for instance they have started to drive the revenue growth if you have to reign in the sales force and could you just kind of balance out, talk about how you balance those two factors?

[Sherman Black:]

Yes Glenn, fair question. First of all in the software company, the majority of our cost are people and we did go in and if you look back to kind of what's transpired over the last 18 months, a year ago this time we were just in the midst of just divesting of the disc publishing business and we had really I would say, inefficient back office process as we were going through that separation areas. We needed to address that and I think we started doing that with these cuts. On top of that we acquired a company. We brought in Kulu Valley in early of Q4 last year. We added 36 employees to the company and then we put in front of you a very aggressive growth plan that we unfortunately backed off last quarter. That growth plan forced us or required for us to bring on a lot of headcount. We built out support plans not only in terms of quota carrying sales reps, but also the supporting folks for that to do that and that happened in Q4 and Q1. What we've done in the last month started in Q2 and has continued throughout the month of July and August. We've gone in and really done a complete operations review making cuts where we can. We've been very balanced. We still have a very rich growth opportunity in front of us. This market is growing. We have a fantastic leadership position in the industry and we want to find the right balance on that. We did take out several employees unfortunately over the last couple of weeks and our intention is to really be back in headcount about where we were at the end of 2014. 2015 we'll end up at about that same point. In terms of how that affected sales, from a quota carrying perspective, we had invested heavily in channel. We had also made some significant investments internationally and as part of this we did scale those areas back, but in the core where we've been benefitted and where we continue to see high confidence returns we've left all that in place and very focused on that. That's on the -- I would say the headcount perspective. On the other side of it, there is a lot of other discretionary spend and so we've gone through everything from all of our contractor, our vendor expenses, travel and everything that's discretionary and then lastly, our senior leaders are also taking a pay decrease to support this effort as well.

[Glenn Mattson:]

Okay. Sounds comprehensive and then can you tell us were there any large one time deals this quarter perpetual license stuff?

[Sherman Black:]

Large, yes, I would say the large insurance -- diversified insurance company I spoke to earlier it was under $2 million, but it was a large -- it was certainly a large deal.

[Glenn Mattson:]

And that was perpetual license.

[Sherman Black:]

Yes it was.

[Glenn Mattson:]

Okay. Great.

[Sherman Black:]

On premise perpetual. And in fact this quarter we did definitely saw heavier on-premise perpetual is still revenue to be recognized on that, but that was definitely a much different mix in Q2 than we saw in Q1.

[Glenn Mattson:]

Okay. Great. I'll cede the floor, thanks.

[Sherman Black:]

Thank you, Glenn.

[Operator:]

[Operator Instructions] At this time, we'll take our next question from Steve Vonder Haar with Wainhouse Research.

[Steve Vonder Haar:]

Hi folks, I was wondering if you could walk through the difference between software licenses and appliance revenue vis-à-vis service. It seems like we pretty much have a flip and I want to make sure I understand is services -- is that Kulu Valley hosted services or is that professional services and if you could provide a little more color around that, that would be great.

[Sherman Black:]

Yes, the reason it looks like a flip Steve is there is also -- first of all, thanks for dialing in Steve, but the reason it looks like a flip is in that services revenue there are -- it's not a lot of recurring revenue in that as well. We bucketed that into services. We'll continue to look at what's best way to provide you a clear look at that as we go forward. Just one of the things that Peter is looking at as we speak. Peter do you want to…

[Peter Goepfrich:]

Services include maintenance and support on licenses and include subscription deals or SaaS based cloud offerings. It includes professional services and managed services. So essentially all -- a variety of service elements including subscription deals.

[Steve Vonder Haar:]

Yes that really fudges that number up quite a bit when you put the recurring revenues in with the maintenance and service stuff.

[Sherman Black:]

Yes it does and we're in the midst of a company that's in the midst of making a transition and as we do that Steve, we'll be working to provide a better view for you on that.

[Steve Vonder Haar:]

Okay. And when we look at in just in terms of number of bodies, how high did you get in terms of number of employees and where do you expect to be at the end of 2015, like where we are at the peak and where we would be once you settle out?

[Sherman Black:]

Yes so at end of June, we were at about 238 and if you back out I think you want to do this, I think you want to think about the India activity, or our India operations where we are continuing to grow the company and we will continue to grow. If you back that out, we were up around I guess we were up about 209 people. We'll be probably down around 190 at the end of the year and we have already made many of those -- most of those cuts have already been made and that gives us back a lot where were in December of last year.

[Steve Vonder Haar:]

Got you. Thank you.

[Operator:]

[Operator Instructions] It appears there are no further questions at this time, I would like to turn the conference back to Management for any additional or closing remarks.

[Sherman Black:]

Thank you, operator and thanks again everyone for joining us today. We look forward to providing you an update on our third quarter results in early November. Thank you again, bye, bye.

[Operator:]

This does conclude today's conference. Thank you for your participation. You may now disconnect.