Qumu Corporation
Q3 2015 Earnings Call Transcript

Published: 8 Nov 2015

[Operator:]

Greetings, and welcome to the Qumu Corporation Third Quarter 2015 earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder this conference is being recorded. With no further ado, I would like to turn the conference over to our host Vern Hanzlik, CEO of Qumu Corporation. Thank you, Mr. Hanzlik, you may begin.

[Vern Hanzlik:]

Thank you, Tim, and good afternoon, everyone. And thank you for joining us for our Fiscal Third Quarter 2015 Earnings Conference Call. Some of our comments today may contain forward-looking statements which are subject to risks, uncertainties and assumptions should any of these materialize, should our assumptions prove to be incorrect, actual company results could differ materially from these forward-looking statements. A description of our risks, uncertainties and assumptions and other factors could affect our financial results, are included in our SEC filings, included in 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 or results. This detail may or may not be provided in the future. It may also refer certain unreleased services or features not yet available and we cannot guarantee the timing or availability of these services or features. So we recommend customers listening today may purchase decisions based on services or features currently available. To begin, I want to share with everyone how excited I am to be leading Qumu at this pivotal time in the evolution of the fast growing enterprise video market as we drive our expanded leadership and market position. I believe that we have the strongest team and the best product in the market. With me today is Peter Goepfrich, our CFO. I look forward to working more closely with Peter as he continues to make a positive impact on our operation and financial processes. His experience and capability will be key to our success. Not around cost containment - not just around cost containment, but around our entire sales process. I will begin the call with third quarter financial highlights, our current financial outlook. Then Peter will provide additional financial information. From there, I will provide other operational highlights and comments on the market. After that, we will open the call to questions. In the third quarter, we delivered excellent revenue growth and implemented a significant expense reduction program. We generated record quarterly revenues of $9.6 million, an increase of 64% compared to third quarter 2014, and an increase of 10% sequential growth compared to second quarter 2015. The year-over-year quarterly growth in license and appliance revenue is primarily attributed to an increase in perpetual license booking. The year-over-year quarterly growth in services is due to increases in all the areas including maintenance and support, subscription and support, and professional services. Contracted commitments were $7.5 million for the third quarter compared to $6.6 million to the third quarter 2014, and $8.3 million for second quarter 2015, the decline from second quarter 2015 primarily due to timing, maintenance and support renewals. Geographically, the Americas market continues to show strong adoption of enterprise video. Our enterprise business performed well and we see strength building in EMEA region under new leadership. In APAC we closed the transaction with a large manufacturer for live and video on demand applications, and we continue to make progress developing our pipeline through our partnership with Fujitsu. One of our America wins in the third quarter is a Fortune 500 diversified chemical manufacturer. They have tens of thousands of employees and hundreds of offices distributed around the world. Like many businesses they’ve invested in inside the firewall video platform, maximize employee engagement and collaboration. The company runs over 300 live events on an annual basis on our video platform, and is starting to expand to the next level with mobile and user-generated content. Now, on to our expense reduction program, it’s implemented in third quarter to align our expense structure with revenue. Expense reduction program is expected to result in more than $9 million annualized expense savings compared to the first nine months of 2015 when annualized. The expense reduction impacts all functional areas, including both headcount and outside services. During the balance of 2015 we continue to expect significant bookings and revenue growth based on a strong Q4 pipeline. As a result, we expect annual revenue growth in 2015 approximately 30%, gross margins in 2015 of approximately 48%, and cash and marketable securities at the end of 2015 to be approximately $14 million. Additionally, based on revenue growth and the expense reduction program, we continue to anticipate cash flow breakeven during 2016. For additional financial information, I’ll turn the call over to Peter.

[Peter Goepfrich:]

Thank you, Vern, and good afternoon. I will touch on some key highlights not already addressed by Vern. License and appliance revenue will vary quarter-to-quarter based on the type of contract between Qumu and its customers. Perpetual license and appliance sales generally result in revenue recognized closer to the bookings date. Service revenue which consists of maintenance and support, subscription and support and professional services tends to grow more consistently with the renewal and expansion of existing customers and the addition of new customers. Revenue that is recurring in nature includes maintenance and support and subscription and support. Recurring revenue represented approximately 77% of service revenue and 50% of total revenue in the third quarter of 2015. Gross margin in third quarter 2015 was 49% compared to 45% in the third quarter last year, and 49% in the second quarter of 2015. As we generate additional revenue, the leverage on our investments and customer support and professional services will increase and we expect gross margin to continue to improve. Moving on to operating expenses, total operating expense in the third quarter increased $2.2 million compared to the third quarter last year and $753,000 compared to the second quarter of 2015. Third quarter 2015 results included severance expense of $784,000 relating to our expense reduction program and an equipment operating lease loss of $1 million relating to an equipment that we no longer plan to utilize as part of our managed service offering. Cash, marketable securities and restricted cash were $15.1 million as of September 30, 2015, compared to $21.8 million as of June 30, 2015. The decrease reflects the third quarter operating results and the impact on cash from changes in working capital primarily related to a $1.5 million customer payment that was anticipated in the third quarter or received in the fourth quarter. We are confident that with our anticipated revenue growth and our expense reduction program we will finish 2015 with approximately $14 million in cash and marketable securities. Now back to Vern with additional operating highlights and comments on our market.

[Vern Hanzlik:]

Thanks, Peter. Before I get into the details of that operational highlights I want to set the table by reviewing key areas of focus as a company and provide some commentary. Qumu is how business does video. And only Qumu is capable of securely distributing, controlling video to anyone on any device, on any network even, if that network has never been designed to handle video streaming and provide it at enterprise scale. Further, Qumu’s focus on user experience continues to set the bar high for our competitors. Through multiple successful customer proof-of-concept engagements this quarter, Qumu have demonstrated once again that we are still the only vendor with technology and solutions available in the market today that are proven to scale and meet the business video challenge. We continue to win deals because customers demand the choice and control and completeness of our offering. Our R&D investments have resulted in significant new product introductions and technology partnerships further our lead in the marketplace as noted by the 2014 Gartner report. For example, we provide a suite of new features for our cloud and hybrid platform that enable every desktop in the enterprise with advanced creation and edit capability. This means everyone can use video to enhance their work product. Additionally, highly configurable user portal interface enabling all our customers’ employees to find a consumer content with an exceptional user experience. We also announced a new partnership with Unicon to leverage our Qumu’s video optimization path for Citrix. Through this partnership, we can bring a full scope of Qumu’s enterprise video functionality to a low bandwidth VDI desktop. This provides ease-of-use content creation, localized content delivery and a small customized well secured OS footprint. Using these video tools, customers can be able to provide or create content for e-learning, product information, product tutorials and video demonstrations to any endpoint in their organization. These are powerful use-cases for video in the enterprise, to solve enterpriser advancing video everywhere as the normal way to communicate. Qumu announced a technology partnership with Elemental, an integration with Elemental’s enterprise class and coding solution to allow our customers to have broadcast-quality video in all of their studio endpoints. We also announced a new partnership in the Middle East with Ixtel, a great partner with reach into focused verticals such as banking, oil and gas in that region and will drive additional opportunities for Qumu. We continue to see enterprises acquire their video software platforms in all deployment styles. On premise, hybrid, cloud, we have a high percentage on-premise deployments for both new and existing customers in Q3 in our pipeline for Q4. Despite this, we continue to have the vision of building our software with the cloud-first approach or packaging for all types of deployments. Our largest enterprises are financial services, pharmaceuticals and industrial verticals. The majority of our deployments in Q3 were either on-premise or hybrid which together represents 75% of deals to date for 2015. On the other hand, our product deployments are mainly departmental in large and medium sized enterprises focused on user generated content and/or excellent video requirements to integrate with marketing automation tools like Eloqua and Marketo, as well as websites, social applications and enterprise content and management applications like SharePoint and Jaz [ph]. Our hybrid deployments today are based on upgrades within organizations, who wanted to change the cost of ownership of video, but keep the delivery and the user experience on firm. We continue to see this as the growth area and a competitive differentiator. We continue to expand and upgrade our enterprise customers. In the quarter, we saw 14 large enterprises implement and upgrade to the latest release and expand their video platform footprint. We closed 14 enterprise deals greater than $200,000 in contract value both existing in new customers and one transaction greater than $1 million in bookings for the quarter. Our maintenance, support and cloud customers continue to renew a greater rate than 90%. It was a very productive quarter from an operational standpoint. We’re positioned well for the remainder of the year and into 2016. In summary, I like where we are today. We have a strong product and the right vision, a strong team and the right momentum carrying us into the next year well-positioned to reach our corporate milestones of being cash flow breakeven during 2016, without sacrificing our growth objectives. Now, we’d like to open the call to questions.

[Operator:]

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] One moment, please, while we poll for questions. Our first question comes from the line of Glenn Mattson of Ladenburg Thalmann. Please proceed with your question.

[Glenn Mattson:]

Hi, thanks for taking the question. Obviously, you have a business plan put together for 2016 given the cash flow guidance. Could you tell us what type of revenue growth you envision within that plan to hit the target you set up?

[Peter Goepfrich:]

Glenn, at this time we’re not giving broader guidance on 2016 other than our focus to make sure while growing we’re going to be cash flow positive during the year.

[Glenn Mattson:]

Okay. Sounds good, I can understand that. And then, can you give - maybe a little bit about the market place, can you talk about pricing in what you’re seeing in the field? Are you finding that to be a bit more competitive and do you have to walk away from deals based on pricing, or do you win or lose ever on price anything like that?

[Vern Hanzlik:]

Yes, Glenn, this is Vern. From the enterprise perspective on the larger enterprises we don’t see the price erosion. As I mentioned in my comments on the proof of concepts where we actually deploy, those are the ones where we hold where we don’t have the elasticity on the price. I would say on some of the cloud pricing is a little bit more aggressive than the departments, as I mentioned. But, on the enterprise side, when we have larger deployments we’re holding the value. It’s more the cloud in the infrastructure around cloud computing in the departments that we see a little bit more price aggressiveness with the competitive landscape.

[Glenn Mattson:]

Okay great, thanks. And then, one last one on the balance sheet, is there any liability that we should know about, maybe like some earn-outs? Can you remind us on the Kulu acquisition that may result in an outflow of cash that I am not thinking about?

[Vern Hanzlik:]

No, there isn’t.

[Glenn Mattson:]

Okay, great. Thanks. Good luck for rest of the year.

[Vern Hanzlik:]

Thanks, Glenn.

[Peter Goepfrich:]

Thank you.

[Operator:]

Our next question comes from the line of Jeff VanRhee of Craig-Hallum. Please proceed with your question.

[Jeff VanRhee:]

Hi, Peter. A couple questions for you guys. First, I guess, just to be clear, Peter, on the cost savings in terms of taking the first nine months year-to-date, that is off of the GAAP reported number that you’re then going to save in annualized rate of, what was it, I think you said nine, but just to be clear, is the first nine months GAAP OpEx ?

[Peter Goepfrich:]

Correct. Annualize that and back up - the less the $9 million.

[Jeff VanRhee:]

Okay. And then, you had several unusual items this quarter. You had the severance, the $1 million equipment lease loss, and then a little bit of a tax benefit. But just to be clear, those items are in that number that you’re saying off of that baseline will save X [ph] correct?

[Peter Goepfrich:]

Yes, it’s right, other than the tax benefit component, yes.

[Jeff VanRhee:]

Yes, okay. I guess, so, Vern, at a higher level when you look at the guide I think you had been choosing for a 40%-plus revenue growth, now 30%. As you look at what you’re booking and where the revenue shortfall is coming, can you just give a little more expansion on the sales process and kind of what’s working, what’s not? And in particular, is the shortfall more coming from the Kulu side or the Qumu, the traditional Qumu solutions side?

[Vern Hanzlik:]

Yes. I think, Jeff, as I think that this stuff we’re looking at the - I mean, the pipelines that gets kind of from a revenue perspective it’s where they fall. And I think that’s the one thing that we look at from where the growth is on the revenue side. I mean, I think the contracts and the bookings piece it’s how it lines up in the quarter. So - but I would say that, on our cloud side, which I kind of referred to it versus the Kulu side, because it sort of integrated with us. Our enterprise side is functioning quite well. Those are proof-of-concepts and those turn into revenue. And it’s based on timing. In the larger transactions, just take longer to bring in the door and it’s not any different than some of the other ones that we’ve done in the past and it’s just timing. And so, I would say that, kind of why we made some adjustments on the guidance is just timing on some of the things coming in the door, not the strength of the pipeline.

[Jeff VanRhee:]

Okay. And then, there is also I think in the press release a reference to timing around renewals on some - I was unclear what that was referring to, can you just expand on that?

[Vern Hanzlik:]

Yes. That was just some maintenance in contracts that we had in Q3 on the renewals for the bookings. So, they just slipped into Q4.

[Jeff VanRhee:]

Okay. I think that’s it for me. Thanks.

[Peter Goepfrich:]

Thanks, Jeff.

[Operator:]

[Operator Instructions] At this time there are no further questions in the audio portion of this conference. I would now like to turn the conference back over to management for closing remarks.

[Vern Hanzlik:]

Okay. Thanks, Tim. Thank you for joining us today. We look forward to updating you on our Q4 results in early March. And in the meantime, if you have any follow-up questions, please contact us directly. And thank you for your time.

[Operator:]

This concludes today’s teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful rest of your day.