Brian Denyeau - Investor Relations, ICR, LLC David Mendels - Chief Executive Officer Kevin Rhodes - Chief Financial Officer.

Parker Lane - Stifel, Nicolaus & Co., Inc. Glenn Mattson - Ladenburg Thalmann Financial Services, Inc. Steven Frankel - Dougherty & Company LLC Lee Krowl - B. Riley & Co. Nick Altmann - Northland Securities, Inc..

Thank you for standing by. This is the conference operator. Welcome to the Brightcove First Quarter 2017 Earnings Call. As a reminder, all participants are in listen mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions.

[Operator Instructions] I would now like to turn the conference over to Brian Denyeau. Please go ahead, sir..

Good afternoon, and welcome to Brightcove's First Quarter 2017 Earnings Call. Today, we'll be discussing the results announced in our press release issued after market close today. With me on the call are David Mendels, Brightcove's Chief Executive Officer; and Kevin Rhodes, Brightcove's Chief Financial Officer.

During the call, we will make statements related our business that may be considered forward-looking and are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements concerning our financial guidance for the second fiscal quarter of 2017 and the full year 2017, expected profitability, our position to execute on our go-to market and growth strategy, our ability to expand our leadership position, our ability to maintain and upsell existing customers, and our ability to acquire new customers.

Forward-looking statements may often be identified with words such as we expect, we anticipate, upcoming, or similar indications of future expectations. These statements reflect our views only as of today and should not be reflected upon as representing our views as of any subsequent date.

These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations.

For a discussion of the material risks and other important factors that could affect our actual results, please refer to those contained in our most recently filed annual report on Form 10-K and as updated by our other SEC filings, including our most recent quarterly report on 10-Q filed today.

Also, during the course of today's call, we will refer to certain non-GAAP financial measures. There is a reconciliation schedule showing GAAP versus non-GAAP results currently available in our press release issued after market closed today, which can be found on our website at www.brightcove.com.

In terms of the agenda for today's call, Dave will provide a summary review of our financial results and market opportunity, as well as an update on our operations. Kevin will then finish with additional details regarding our first quarter 2017 results as well as our guidance for the second quarter and full year 2017.

With that, let me turn the call over to David..

Thanks, Brian, and thanks to all of you for joining us today. Brightcove have reported mixed first quarter results with revenue of $37.6 million, which was above the midpoint of our guidance, and non-GAAP loss per share of negative $0.08, that was below our expectations.

The quarter-over-quarter reduction in profitability was primarily due to lower gross profit margin.

We experienced a higher mix of consulting revenue associated with large OTT projects as well as some one-time adjustment costs associated with migrating the entire video library of one of our large Japanese customers onto our platform ahead of the launch of its new VOD offering in the second quarter.

We expect that we will expand gross margins back to historical levels in the second half of the year.

Underlying our confidence in this expectation is our continuing effort to migrate our customers to our new Dynamic Delivery system and getting closer to finalizing the last phase of moving our core infrastructure to the cloud, which will ultimately give us a more robust, flexible and cost effective infrastructure.

We also expect an improving mix of subscription and professional services revenue as some of the large OTT projects we've been working on go live later this year. Our first quarter performance included a combination of encouraging progress in our bookings growth and some unforeseen headwinds related to retention rates in our media business.

The net result is that we are lowering our revenue and profitability outlook for the year, which Kevin will provide in more detail later.

We are disappointed by this near-term headwind, but it does not diminish our belief in the opportunity for Brightcove and in our ability to achieve long-term financial targets of 20% plus revenue growth and 15% to 20% adjusted EBITDA margins. I will go into greater detail on why we remain confident in our long-term prospects in just a few minutes.

At a high level, it is the combination of selling into a large and rapidly evolving market, an exciting pipeline of product differentiation that will expand the value we can deliver to customers, and a strategy we are executing against that will improve the long term retention and growth rates.

I'd like to take a few minutes to talk about our bookings performance, and then I will provide some more context about what is impacting our retention rates. We are pleased with our first quarter bookings performance and believe we are on track to deliver on our target of mid to high-teens bookings growth for the full year.

We are particularly pleased with the new customer acquisition we saw during the quarter, which we believe underscores the positive impact of the investments we've made in our product and sales organizations. We have the broadest and most robust product portfolio in the company's history and in the market.

New products such as Dynamic Delivery and the newly introduced Brightcove Live are driving strong customer interest and value for our media customers, while purpose-built solutions like Social, Audience and Gallery are addressing the specific needs of enterprises and digital marketers.

We will be introducing several great new product enhancements and features at our annual PLAY user conference, upcoming on May 22 and 23. Looking ahead, the pipeline of deal activity across our business remains strong.

When we look at the success we're having in winning new logos and expanding customer engagements with upsells, we are confident that our go-to-market strategy is the right one and will be successful.

While we are pleased with the solid bookings performance in the first quarter and throughout 2016, it has not yet translated into consistent improvement in subscription revenue growth. We discussed last quarter the impact of the loss of our largest customer, due to its company-specific business and financial issues.

After the first quarter, it became clear that we will also be facing a significant and unanticipated reduction in our revenue retention rate related to our media business, and this will be an additional headwind over the next four quarters.

Let me explain what we are seeing in this part of the market and the revenue retention challenges that we are facing. As you all know, we sell a bundled solution that includes third-party commodity components such as content delivery and storage, along with our unique software platform.

The primary value we provide has always been in our proprietary software solutions, but this bundled approach was designed to make it easier for our customers to purchase all of the elements they need to manage, store and deliver their video assets to their users.

As is well known in the industry, price declines for these third party commodity services have been a moderate but consistent factor for years, and something we've included as part of our revenue retention and financial models.

What has changed is that in Q1 we saw a significant increase in the price competition among CDN and cloud infrastructure providers, which accelerated the impact of these changes in our business.

To be clear, this pricing pressure is being driven substantially by competition among CDN and cloud infrastructure providers, and not by any particular change in our competitive positioning.

We've taken steps to mitigate this pricing risk by bringing new packaging solutions and technologies to market that increase the value of the Brightcove software platform to customers.

Dynamic Delivery, formerly known as Bolt, is a perfect example of the enhancements made to the platform, that can capture greater amounts of revenue as customers pare back their bandwidth and storage cost.

We had a number of great examples of this recently with large media customers, where we were able to retain a large portion of the customer's total contract value, even while significantly reducing the revenue associated with commodity elements such as bandwidth and storage.

By shifting the value from elements like CDN to our software platform, we reduce the portion of our revenue that is under pricing pressure and set ourselves up for much higher retention rates, as we lap the current market adjustment.

As we look at the second quarter, a specific one-time example of this dynamic is occurring in Japan, a market where we have had and continue to have great success. The cost of content delivery in Japan has been quite a bit higher than the rest of the world for a long period of time, which was reflected in our bundled price offerings.

During the first quarter, we learned that several of our large Japanese broadcast customers have entered into an agreement with a Japanese telecommunications provider to form a new entity named JOCDN [ph], which will provide CDN services to these broadcasters and several other customers and potential customers in Japan.

We expect this will impact our revenue retention by approximately 300 basis points in the second quarter. While this will lead to lower contract values, we anticipate recapturing a large portion of that revenue by shifting value from commodity elements to our software platform and new services like Dynamic Delivery.

To be clear, our relationships with these customers remain strong. And the large contracts we signed in the region last year will begin layering in to our subscription revenue later this year.

As we renew these contracts in the future, we will continue to be in a very strong position, with the strategic and growing relationships with our major customers in Japan.

Taken altogether, we believe that there is a $10 million to $13 million revenue headwind over the next 12 months that we need to cycle through as we renew certain media customer contracts to reflect current pricing in certain parts of the market.

While this was unanticipated at this scale, we will emerge in a stronger position to return to and improve on our historically high retention rates. Combined with our strong bookings and new product offerings, we anticipate getting back on track with our goals, significantly accelerating revenue growth with profitability.

I want to assure you that we are working to diligently position the company for long-term success. We remain committed to growing this business and returning it to a 20%-plus revenue growth over time.

We continue to see encouraging bookings performance, and we believe that we have an improved product and pricing strategy to mitigate the revenue retention losses going forward. We have made significant investments in the business over the past year, and our focus for the remainder of 2017 will be to optimize these investments.

We believe our current sales capacity and customer pipeline will enable us to deliver on our 2017 bookings goals. For this year, our goal is to work through the revenue retention headwind, which will impact profitability as well. We expect a full year adjusted EBITDA loss of $1.5 million to $4.5 million.

However, we expect to return to adjusted EBITDA profitability in the fourth quarter of this year. I would like to address how we're thinking about the balance between growth and profitability. Throughout our time as a public company, we have taken a balanced approach to investing for growth and driving profitability.

We've shown we can be successful in this approach with organic revenue growth accelerating throughout 2016, while we delivered a second consecutive year of adjusted EBITDA profitability and positive free cash flow.

We've made significant investments in the business across both our product and sales and marketing organizations in the past year to position the business for improved growth. This has positively impacted our bookings and also provides additional capacity for future growth as well.

Given the near-term revenue retention issue we are addressing, our focus from an expense perspective is to optimize the investments we've already made and be more opportunistic with additional investments for the remainder of the year in order to return to adjusted EBITDA profitability in the fourth quarter.

We strongly believe that making more drastic cuts would only serve to damage our growth prospects and shareholder value. The bottom line is the areas that we are investing in are generating attractive returns.

To cut spending in those areas in order to offset the impact of a pricing adjustment in another portion of the business does not make sense in our view. If we do not believe that the business could reaccelerate growth meaningfully, we would shift towards some more profit-focused steps. Given the trends we are seeing, that is not currently the case.

As I mentioned previously, we remain confident that Brightcove will return to 20%-plus growth over time. I want to be clear about what is underpinning that confidence. First is the size of our market, which we believe is a large multi-billion-dollar potential opportunity, for both the media and digital marketing and enterprise markets.

For digital marketing and enterprise customers, they are just beginning to recognize the value integrating video into the next generation marketing stack or internal communications efforts can have on customer engagement, sales convergence and employee alignment with corporate goals.

For media customers, we see the potential for a tipping point over the next few years, as more and more of the largest media companies in the world re-platform after years of dealing with the complexity of fragmenting formats, the expansion of consumer devices and the transition away from the Adobe Flash technology.

The cost of taking a DIY approach to online video delivery is increasingly cost and time prohibitive.

Indeed, as we help some of the world's premier OTT services launch new properties we're able to help them deliver best-of-class experiences at costs that can be a small fraction of the costs of what it took to launch first and second generation services like Netflix or Hulu.

We are seeing signs that these customers are recognizing that leveraging best-of-breed third party solutions is the most effective and flexible approach to meeting the needs of today's consumers. Second is our bookings performance, which we believe is on track to grow mid to high teens this year.

Given the state of the market opportunity, and the sales and marketing investments we have made, we believe this growth rate will increase over time. Third, we expect the retention rates in our media business to rebound after we work through this commodity pricing reset over the next 12 months.

Importantly, we are not seeing meaningful pricing pressure on the core software components of our bundled offering. And on the other side of this adjustment, a greater percentage of our media revenue will be proprietary value-added software.

In fact, customers are demonstrating willingness to invest more in our software platform as we continue to enhance our offerings. Fourth, we expect our revenue mix to skew more heavily towards digital marketing and enterprise versus media in the coming years.

Digital marketing and enterprise has consistently higher retention rates, and this mix shift will positively impact overall retention rates and gross margin over time. Ultimately, we have a strategy we are executing against that we expect to return us to double-digit revenue growth in 2018.

I'd like to close by sharing a few customer stories that reflect the momentum we are seeing in the market.

During the first quarter, Brightcove saw new customer wins and significant upsells in our digital marketing business, including Allianz Global Investors, Daimler Trucks North America, Hitachi High-Tech Solutions Corporation, KYOCERA Document Solutions, Macy's Inc., Morningstar Inc., Salomon and TD Bank, among others.

We signed several important deals this quarter with companies looking to use our online video platform internally, within and across the enterprise, which is a growing portion of the customer demand we are seeing, and an incremental and important focus for us.

Konica Minolta chose Brightcove to power an internal video portal for its local sales team to share product and competitive information. Konica Minolta saw Brightcove Gallery as a competitive differentiation, especially Gallery's security capabilities to handle sensitive content and the ease of delivering video to multiple devices.

Similarly, a focus on increasing the use of video for sales training and enablement of both its internal and independent agents drove New York Life Insurance Company to grow its relationship with us in the first quarter.

In each of these cases, customers are planning that the initial use of Brightcove will spread within the organization to support other internal and external use cases.

Our media business also had a strong quarter of customer additions and upsells, including Condé Nast Japan, Discovery Networks Asia, News UK, New York Post, Total Sports Asia, TV TOKYO Communications Corporation and Young Hollywood among others.

One noteworthy win was Southern Cross Austereo, one of Australia's largest commercial broadcasting companies, which selected Brightcove as the foundation for its online video offering. SCA is using Brightcove's Video Cloud platform to manage its entire video workflow and to increase ad performance.

In its first week of deployment, FCA saw an increase in engagement from its previous average completion rate of 40% to 75% to 80% when using Brightcove. On the live streaming front, successful use of our now live streaming service led Tennis Australia to increase its relationship with Brightcove.

Beginning with the lead-up tournaments in Australia as well as the Australia Open qualifying and then the Australia Open itself, the Brightcove online video platform and our new live service provided up to 17 simultaneous live streams to over 23 worldwide locations.

The live streams, together with up to 300 highlight clips each day across the Australian Open website, had a combined audience of over 11 million views. Similarly, a prominent U.S. sports organization has significantly expanded its relationship with Brightcove this quarter in order to live stream a major upcoming sporting event.

We're excited to share exciting new product innovations with current and prospective customers in a couple of weeks at PLAY 2017, our annual user conference.

PLAY has established itself as one of the leading industry event, with thought leaders gathered to better understand trends in the online video marketplace and help Brightcove enable its customers to benefit from market changes.

This year's PLAY, which is our biggest yet, with a 50% increase in attendees from last year, will include an increased focus on the enterprise market where we see a major growth in front of us. In summary, I am disappointed in our first quarter results, which were surprising, given the positive momentum we've shown as a business over the past year.

While we are seeing the positive impact of our investments we made in our business and our bookings growth, we are facing significant challenges to our revenue retention rate in our media business over the next year.

We take responsibility for the lower revenue and profitability outlook for 2017, but believe this is a temporary phenomenon we are proactively working to address. We're confident in our ability to return to double-digit revenue growth in 2018 and that we can achieve our long-term financial targets.

We are in the early stages of a multi-billion-dollar market opportunity and we are well positioned to capitalize on it. With that, let me turn it over to Kevin to walk you through the numbers..

Thank you, David, and good afternoon, everyone. I will begin by discussing our first quarter results. And then I will finish with our second quarter guidance and updated outlook for the full year 2017.

Total revenue in the first quarter was $37.6 million, up 4% from $36.3 million in the first quarter of 2016 and above the midpoint of our guidance range. Breaking revenue down further, subscription and support revenue was $34.2 million, which was down 1% on a year-over-year basis.

Our subscription revenue in the quarter was impacted by the loss of our large customer that we discussed on our last call as well as lower overages, and to a lesser extent, the revenue retention losses during the first quarter. Professional services revenue was $3.3 million in the first quarter.

The increase in our Professional Services revenue was driven by higher-than-usual amounts of application development work associated with several large OTT projects. Now let me add some color around our revenue mix. On a geographic basis, we generated 62% of our revenue in North America during the quarter. Europe generated 16% of our revenue.

And Japan and Asia-Pac generated 22% of revenue during the quarter. From a vertical perspective, our media business represented 55% of our revenue in the quarter and our digital marketing enterprise business represented 41% of our revenue, while volume [ph] represented the remaining 4%.

Let me now turn to the supplemental metrics that we provide on a quarterly basis. Our reoccurring revenue retention rate during the first quarter was 85%, which was below our target range of the low to mid-90%s.

As David already discussed, our retention rate in the quarter was negatively impacted by the commoditization headwinds that are affecting our media business. Our customer count at the end of first quarter was 4,411, of which 2,021 were classified as premium customers.

Looking at ARPU within our premium customer base, our annualized revenue per premium customer was $67,000, which was down 3% year-over-year, and excludes our entry level pricing for starter customers that averaged $4,800 in annualized revenue.

Looking at our results, on a GAAP basis our gross profit was $22.4 million, operating loss was $5.1 million and loss per share was $0.15 in the quarter. Turning to our non-GAAP numbers, our non-GAAP gross profit in the first quarter was $23 million compared to $23.6 million in the year-ago period and represented a gross profit margin of 61%.

The decrease in our non-GAAP gross margin was due principally to additional costs associated with the OTT consulting and video library migration that David discussed earlier, as well as a shift in revenue mix towards lower-margin professional services projects.

In addition, we had a lower level of overage revenue than anticipated, and overages typically carry above-average gross profit margins. Subscription and support revenue represented approximately 91% of our total revenue, and generated a 66% gross margin in the quarter.

We expect to generate improvement in gross margin throughout the second half of 2017, as we complete the migration to our new cloud infrastructure and our revenue growth improves later in the year. Non-GAAP loss from operations was $2.6 million in the first quarter compared to non-GAAP income from operations of $714,000 in the first quarter of 2016.

Our profitability in the quarter was impacted by higher-than-anticipated subscription revenue retention losses, as well as some higher-than-anticipated onetime injection fees associated with a large international customer, resulting in our lower gross profit margin.

Adjusted EBITDA was negative $1.6 million in the first quarter, compared to positive $2 million in the year-ago period, and it was impacted by the same items that I just noted.

Non-GAAP loss per share was $0.08 based on 34.1 million weighted average shares outstanding, which compares to earnings per share of $0.02 on 33.6 million weighted average shares outstanding in the year-ago period. Turning to the balance sheet and cash flow, we ended the quarter with cash and cash equivalents of $29.2 million.

We used $6.6 million in cash flow from operations during the first quarter. With $1 million in capitalized expenditures and capitalized internal use software, free cash flow was negative $7.6 million in the first quarter.

We do typically see a reduction in cash flow during the first quarter as a result of year-end performance payments, renewals and insurance policies and higher payroll taxes. This quarter, we also had a $900,000 payment related to the data center closure that we announced in the fourth quarter.

I'd now like to finish by providing our guidance for the second quarter and our updated outlook for 2017. We now expect revenue to be in a range of $151 million to $155 million, which represents year-over-year growth of approximately 1% to 3%. This includes approximately $10 million to $11 million in professional services revenue.

In terms of profitability, we are lowering our non-GAAP operating profitability to be a non-GAAP operating loss in the range of $6 million to $9 million and adjusted EBITDA to be a loss of $1.5 million to a loss of $4.5 million.

In addition, we now expect non-GAAP net loss per share of $0.19 to $0.28 based on 34.3 million weighted average shares outstanding. For cash flow, we now expect full year free cash flow to be in a range of negative $7.5 million to negative $9.5 million.

This equates to free cash flow over the remaining three quarters of the year to be breakeven to a negative $2 million. For the second quarter, we are targeting revenue of $37 million to $37.8 million, including approximately $2.5 million of professional services revenue.

From a profitability perspective, we expect non-GAAP operating loss of $4.2 million to $5 million, and an adjusted EBITDA loss of $3 million to $3.8 million. Non-GAAP net loss per share is expected to be in a range of $0.13 to $0.15, based on 34.2 million weighted average shares outstanding. And with that, we'll now take your questions.

Operator, we are ready to begin Q&A..

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Tom Roderick with Stifel. Please go ahead..

Hi, guys. This is actually Parker Lane in for Tom. Thanks for taking my question. In light of some of the challenges you guys announced today, I was wondering how you're thinking about your investments in your starter solution as well as some of the investments you made in Latin America towards the end of last year? Thanks..

Hi, Parker. Thanks. So thanks for joining the call, and always appreciate the dialogue. The starter solution is off to a good start. No pun intended. It is a key part of our growth agenda in terms of being able to offer an easy entry point to get customers started, and then grow them over time.

And I do think that is part of where we are seeing some progress and some growth, and part where I think we'll continue to see so. Latin America, we just announced, what, last quarter. I feel quite good about that. It's still very early. We are pursuing a number of significant deals in the region, and as in every region, those deals take a few quarters.

They can be lumpy, and they can be binary. So it's premature to really comment on any form of results other than to say pipeline looks good. There's a lot of good sales activity. There's a lot of opportunity in the region.

It's obviously a region with a very large population and a large number of broadcasters and media companies as well as, of course, enterprises of all kinds, and we feel quite excited about the opportunities in front of us there..

Got it. And then I know last year, you made a big internal push towards multiyear deals with some of your customers.

Was there any change in maybe the magnitude of those deals in the first quarter? And then - and maybe how is the split there? Did you see more new customers on the multiyear deals or renewals fairly similar to that?.

Sure. The - I don't think there's any particular trend to refer to in Q1 per se. We've been moving towards, I think, really over one year now emphasizing multiyear deals with our customers, and obviously, with our sales organization. We saw progress in that over the course of last year.

It is part of how we get ourselves back on the track that we want to be on. When we look at the challenges that we faced, they - part of how we both ameliorate that and well - as well as improve that over time and lap that over time is by continuing to emphasize larger and more strategic deals, and more multiyear deals.

So we have a lot less potential for volatility in that retention rate..

Got it. Thanks, guys..

The next question is from Glenn Mattson with Ladenburg Thalmann. Please go ahead..

Hi, thanks for taking my question.

So with regard to the change in the commodity elements of the solution, am I reading it right that it - that what you've - most of that or, if not, all of that is coming from this issue in Asia?.

No. We broke out the Asia issue, because it is a particular issue, it's a large issue, and it helps us sort of help you - helps us hopefully help you understand the kind of situation we're facing. But the situation we faced in Q1 where we had lower than - significantly lower-than-expected retention rates was not specific to Asia at all.

In Q2, I think, we'll start to see some improvement in some parts of the world, but again, we will face this headwind in Japan..

So the lower commodity pricing was a worldwide phenomenon.

Is that right?.

Yes, it's - it is a global phenomenon. It affects different regions and different customers in different ways, which is why we went from something that felt like a long-term trend that we were aware of and that was sort of in our models and understood to something that was surprising and discontinuous.

And I think you can see, for example, in the Japan situation, while we would have naturally assumed that this is an issue that we need to model into the thing, we - what happened is when you reach a certain point of pressure in a market, it became discontinuous where a number of the largest companies in this space decided to form a joint venture with a different CDN and take that business direct instead of buying it as part of a bundled solution from us.

And so instead of it being a continuation of a long-term trend, it had this discontinuity where it became surprising.

And so the impact of this sort of thing can be varying around the world where you can see, in some cases, a given customer or contract or region you have normal kinds of pressures that you negotiate on a renewal, and in other cases, you have this kind of discontinuity where there's more of a big change.

And what happened here is a long-term trend sort of hit a tipping point for a number of customers in regions that caught us by surprise..

And then so two things. I mean - I guess two parts. Is there - could you give us an idea - you said, going forward, a larger majority of the revenue will be more on the delivery and the software that you provide as opposed to the reselling of some of the commodity stuff.

Can you give us an idea of how much commodity stuff is still in there? And how do you - how are you confident that you ring-fenced it, that it's not going to spread and become more a stair-step function - multiple stair step throughout the year?.

So good question. I mean, I think we've done a lot of work over this last few weeks to look at what happened in Q1 model out, and forecast Q2 and the remainder of the year. We think, we have done a reasonable and thoughtful and complete job of sort of trying to capture the range of risks that we see in that $10 million to $13 million headwind.

We do think that, as it becomes a lesser percentage of our revenue and that happens in a number of ways, individual contracts with a mix shift as we've talked about, also at a corporate level as the mix shifts to more of our digital marketing enterprise customers, who just naturally use less of that because they deliver less video.

And so, as we shift towards more deals that are multiyear, and more deals that I would describe as large and more strategic deals where we're more embedded at a sort of a seven figure level and some of these large OTT kinds of wins that we've talked about over the last year, as that mix shifts, it also helps protect us against this kind of volatility I think.

So we feel pretty good about that $10 million to $13 million headwind. The estimate that we gave you, we think that as we lap that, we should be in a good position.

As we look back, while there has been pressure in this market for some time, we do look at an eight-quarter trend that was fairly stable and some were positive with the exception of that one large customer loss in Q4.

We look at what we see over the course of the next year, and we do feel like we can contain this in the headwind that we described to you..

And I'm assuming you don't want to break out the - what portion of revenue is still - is related to commodity, the resell of commodity storage and so on..

It's not something that we break out, because it's bundled into contracts. And so while it's a factor in the value perception and the way that people buy from us and perceive the way - what they buy from us, it's not something that's easily broken out in an aggregate way..

And last question, you mentioned larger-than-expected ingestion fees. I assume that's from moving video over to the Bolt platform.

And so I'm curious, why it was more expensive than you expected and how to mitigate that risk going forward, once you move everyone over to that platform?.

Yes, it's a good question. I mean, in this case, you could call it a forecasting error in that we didn't properly anticipate the impact of this extremely large customer in the Japan region.

As we move forward, we are doing - enabling more of our customers to ingest, transcode, store and deliver their content within their geography, and those - that's a new thing for us. It used to be that all the content flowed back to the United States and was ingested and stored and delivered out of the United States.

But with the new architecture, it gives us a much more flexible architecture, which allows for higher performance and many benefits for the customer.

And so in this case, I think we didn't properly anticipate with this new technology, and with this new customer the amount of content that they would ingest upfront as opposed to over the life of their contracts, which would be typical for many cases as well as the fact that we had to take into account the different economics of storage in Japan..

Okay. Thanks for taking my questions..

Thank you..

The next question is from Steven Frankel with Dougherty. Please go ahead..

Good afternoon.

Can you clarify something for me? The lower retention rate in the quarter, was that almost all traceable to this commoditization issue, and so that was a customer or customers that re-up this quarter and when they re-upped, and you discounted that pricing, that's what impacted the retention rate? Or were there also some customer losses in the mix as well?.

Well, there's always some customer losses in the mix, right? So we don't typically have a 100% retention rate. And so there's always some customer losses in the mix, and so I wouldn't want to imply otherwise. What we - as we looked at it, we looked at why was this quarter worse than prior quarters, not why was this quarter worse than 100%.

And in that we felt the primary factor, not the exclusive factor, was the impact of pricing economics in these market factors that we talked about.

And so as you can imagine, as you deal with a wide range of customers of varying size and complexity, there is a range of complexity in how they make their decisions, and how they communicate their decisions to us. It's not - it can't always be simplified - narrowed down into a single factor explanation.

That said, we feel confident that the primary gap between sort of normal and terrible was primarily driven by these economic factors that we've talked about. I will say also, when we talk about the revenue retention, keep in mind, it's something we've made clear before, but it is important that, that number also includes upsell at time of renewal.

So it's revenue retention, so it's losses and upsell at time of renewal. And within the quarter, our mix was stronger on new logos, we mentioned that in the script, than it was on upsell. And so that sort of came in at the same time to further affect that retention rate..

And given this disconnect between your embedded pricing and what's going on in the market, do you expect customers to demand the new rates sooner rather than later? Or is this something that's going to flow through the next few quarters as people come up for their natural renewal dates?.

I think that, for the most part, we are on annual or longer contracts. Those are committed contracts, and I expect that we will manage this over the course of time. We always have a flow of some customers, who choose to renew early for a variety of reasons.

And usually, that's actually a positive and a win-win for both the customer and for Brightcove in that, it usually involves where they need more capacity or there's an opportunity to add additional solutions such as our new Live product into the mix as well.

And so we actually can use those opportunities if a customer wants to renew early, where we can shift them to perhaps better pricing on certain elements but simultaneously add value to the contract in other ways, and we can use that as a way to help mitigate the situation. So I don't view that necessarily as a concern..

And where should we anticipate the recurring dollar retention rate to be between now and the end of the year? So is the low-80s the new normal?.

No. I don't think the low-80s is the new normal, I think that was particularly low. It was impacted by the mix among upsells and logos as well as I mentioned. I think that we should be back in the low to mid-90s, but probably on the lower side of where we were last year, where we're often in the mid to high-90s..

Okay.

And then where were overages during the quarter?.

Overages were at $1.9 million in the quarter, Steve..

And then, in terms of ARPU, is this kind of the new base level, again, reflecting the commoditization pressure on pricing? Or was there something in the mix this quarter that broke your string of small increases year-on-year over the last few quarters?.

No. I think the primary factor here was the large customer loss in the fourth quarter of last year as well as perhaps some of that impact that we saw on the overages. So the overages certainly were down this quarter compared to prior quarters, and some of that does relate to overages that are in the areas of things like bandwidth and storage.

And so, I think it's the combination of those two that affect the ARPU in the quarter..

I guess, going at it another way, so in terms of new deals that you are signing, is the ARPU of those deals growing?.

I don't think there's a - we have enough of a trend to speak, particularly about new deals versus sort of our overall ARPU, at this point. But we'll look at that and see if there something we can give you on our next call.

But I think, in general, we saw - the decline in our ARPU this quarter can be attributed to the loss of a large customer and the declining overages, the impact that had from - coming from a small number of customers. It did not include - keep in mind, for retention losses in the quarter, we may still generate revenue for them in the quarter.

So it would not be inclusive of everything that occurred within Q1..

Okay. Thanks..

Thank you..

The next question is from Lee Krowl with B. Riley & Co. Please go ahead..

Hi, guys. Thanks for taking my question. Hate to beat this CDN too hard, but there are a few questions I have on it. First, just out of curiosity, I know you guys mentioned that you had the migration in Japan.

But outside of Japan, was it a multi-vendor pricing cut? Or was it a single-vendor that implemented this pricing reduction?.

Yes. So the interesting thing here is it was sort of the intersection of continuing trends in price competition in the space across vendors with particular customers and markets that caused it to be abnormal or discontinuous or acute, depending on which word you want to choose here.

And so it was not any one move by any one CDN, if that's what you're asking. There has been price pressure and competition in that market, and as I mentioned earlier, that is something that we've been aware of and that we take into account and then have sort of baked into our models. We don't assume that, that grows every quarter for example.

We've never assumed that in our models. And so - but what happens that was surprising was, if you just have a scenario where you have to find a way to discount some piece of overall package to the customer by X percent, 10% or 20%, that's one thing.

But if that pressure gets to a certain point where the customer says, and again, I'll give the Japan example, because that lets me break it out and it's a big number, they say, hey, not only do we want a discount of 10% or 20% or whatever it's going to be, but we're actually going to leave you for the CDN portion of that and buy that direct from a different partner.

That's what caused the surprise. And so it was a complex system problem if you think about it mathematically in that it was the intersection of a long-term trend with pressure in the market in general, which caused a number of customers to make more radical changes..

Got it. Okay. And then just shifting gears really quick. On the OTT front, is - so I know you guys are generating revenue with respect to consulting professional services.

But is the ramp of, I guess, kind of the subscription part of that business, is that contemplated in guidance yet? Or is that something that will be kicking in once it goes online?.

No, no. So first of all, to be clear, we just - and also provide a little context for anyone on the call who wasn't aware of this. We spoke last year about a number of very significant OTT deals that we did that we're quite excited about that are multiyear deals that are seven or, in one case, even an eight figure deal we talked about.

And we did tell you that there was a ramp period on that and that while there were some services that the primary software and subscription revenue will be layering in the course of 2017. I want to be clear that, that's not all the OTT revenue we do.

We have many customers who deliver video over OTT, which refers to over the top, so outside of the cable infrastructure. And those, in most cases, are just recognized normally. And so that's in our models. It's in our revenue.

The particular large deals for which we've talked about that ramp period, you will start to see some of that revenue in the back half of this year, and that is contemplated in the guidance in the model..

Got it. Got it.

And then, I guess, just because I'm perhaps not familiar with a large opportunity with this, but is there an overage portion that you anticipate with these OTT implementations? Because it seems like as more of these products come into the market, there's kind of a learning phase in - with learning phases in kind of infrastructure plays, there's a lot of overages to start out with.

So is that something you guys would experience as the large OTT offering kicks in?.

I think that it really is very difficult to make any general point about that. The - typically, what we do is we enter into one or two or three year contracts with the customers that contemplate certain amounts of usage of our software services. And when people exceed that amount, that can turn into overages.

It really comes down to customers buying and negotiating strategies as to whether they want to buy a larger amount and be less likely to incur overages, and perhaps get a better deal on a rate card versus buy a smaller amount, maybe get not as good a deal on the rate card but incur overages earlier.

And so there isn't a general point there I could make about OTT services in general. We did have lower overages in Q1 than we had over the course of last year.

Some of that's related to the CDN issue that we described in that when people do go into overages, one of those items that goes into overages is usage of bandwidth when they get large amounts of viewing. And so we're currently - our model contemplates overages being very steady at the current levels for the rest of the year.

That's an area where it is hard to model for the reasons I described earlier, but that's our current contemplation..

Got it. Fair enough. Thanks you, guys..

[Operator Instructions] Next question comes from Mike Latimore with Northland Capital Markets. Please go ahead..

Yes. Hey, guys. This is Nick Altmann on for Mike. Thanks for taking my questions..

Thank you, Nick..

By how much do you guys plan on increasing your sales headcount this year? And is there going to be more hiring on the media side or the marketing side?.

I don't have an exact number in front of you, but at this point, there are some hires that will still be made this year in areas that we have, for example, if there are some replacement hires in a few areas and a few areas where we have gaps. But we don't anticipate a large amount of hiring going forward.

We do think that we have ramped our sales force at this point, maybe not every single head that we might like in a perfect world but that we feel like, and I said this in the script, that we have the capacity to achieve the goals that we've reset for ourselves here today.

And so, I think, you'll see more moderate hiring for the remainder of the year..

Okay.

And then can you just talk a little bit about the pipeline for Brightcove Live?.

We're excited about Live. Thank you for asking. It's an opportunity to talk about something new and exciting for us.

We see a couple of things just to mention here that the market - the demand is very high among broadcasters, among OTT services as well as certain nontraditional media companies and enterprises as well doing live events and corporate marketing and the like. Just last week, we helped broadcast the Oracle Modern Marketing event from Las Vegas for them.

And a few months ago, we broadcast the Australian Open with two different companies in Australia, Tennis Australian and Seven West Media. So that was very exciting. But we do see that there's a large and growing market opportunity. We announced our new Live product a few weeks ago. We have a very good early pipeline.

We're getting interest, I think, pretty much I can say in every region of the world, some large deals as well as a broad array of smaller deals.

I think we have a very competitive and exciting offering, our ability to deliver very high-quality live with low latency, with dynamic ad insertion that can be integrated in with broadcast systems to sort of accept the scudy [ph] tones and dynamically introduce the ads at the right point.

But also, the ability to flipping in live to VOD is an important part of our value proposition, and one of the things that's attracting customers. So I think, that'll grow and be an increasing percent of our business. Obviously, we're starting from a small base.

So I don't have a specific number for you on pipeline, but I can say that's an area that we feel quite good about, and that should be generating some of those bookings that we're counting on this year..

Got it. Got it. Okay. And then just last one for me.

Is Salesforce.com helping you guys win any deals yet or not yet?.

I'd say that's still in the early stages. The work we've done there around helping people sort of embed video into e-mail, we have some interest in that. It's an area that we're continuing to work on and bring on to beta. I think it's a very promising idea.

And it really talks to a larger theme that we think a lot about, which is how do we become the platform of record for the enterprise for all of the different ways they want to use video.

So they want to use video in their corporate marketing, in their demand generation, on their landing pages, in their applications, but also, how do they want to feed that into their sales e-mails and prospecting. How do they want to feed that into learning and engagement and corporate communications and the like.

Customer support will be another example that ties in very nicely with the Salesforce thing. And so you'll see us talk a lot about that at Brightcove PLAY, is that this idea that we can really help an enterprise embed video across all of the functions where they engage an audience, that'll be a theme of that part of PLAY.

And obviously e-mail's part of that and CRM will be a part of that. But specifically, the relationship with Salesforce in that specific use case, I'd say, it's probably fair to say that nascent..

Got it. Okay. Thank you..

Thank you..

Next question and the final question is from Glenn Mattson with Ladenburg Thalmann..

Hey, Glenn?.

Glenn? You line is open..

Hi.

Can you hear me?.

Yes. Hi, Glenn.

How are you?.

Just quick follow-up. The - you reiterated guidance for mid-teens bookings growth. But can you give us some color as to why you feel comfortable with that? Just put it in context versus last year when you felt comfortable kind of whole year until the end of the year where you're a little less certain.

So can you just give us a reason why you - some reasons why you feel comfortable there?.

Sure, sure. Thanks for asking. So first of all, we felt good for most of last year. We did inject a note of caution, I think, it was our October call. But then we did achieve that goal, and obviously, achieving the goal, it gave us a little bit more confidence coming into this year.

We obviously can look at in Q1, we feel like we're on track, and so that helps. It's a quarter of the year, which is good. But then, we can look at a number of other factors, which is the hiring we've done and the capacity we have in our sales force, we feel good about that. The product pipeline, we introduced a number of products over last year.

We talked quite a bit about Brightcove Social, for example, but we're adding a number of products this year as well like the new Brightcove Live, which we're very excited about, and that's generating new pipeline. And so, we also are generating new pipeline by expanding into some new territories. So we mentioned Latin America earlier on this call.

We also have a new sales office, just one or two people. Don't want to overweight the thing but - in India, and we see a lot of promise there. So overall pipeline looks good. Sales capacity looks good. Product pipeline looks good. We have a good track record from 2016 and Q1. And so those are reasons to feel quite comfortable.

Obviously, we have work to do, and we've got a lot to prove right now as far as we're concerned..

Okay. Thanks again..

Thank you. So I think that's the end of the question-and-answer period. I want to thank everyone who's joined us. This was not the call we hoped to have at the end of our first quarter, and there's obviously some disappointing news here. And we're frustrated by that, and we're frustrated on behalf of all of our shareholders.

We are - we remain optimistic about the opportunity that we see in front of us and the core innovation and team we bring to bear to go at it. It is a bit of a setback, but we are committed to driving long-term shareholder value. And we look forward to talking to you again in 90 days. Thank you very much..

This concludes today's conference call. You may disconnect your lines. Thank you for participating. And have a pleasant day..