Brian Denyeau - IR, ICR Jeff Ray - Chief Executive Officer Rob Noreck - EVP & Chief Financial Officer.

Parker Lane - Stifel Steve Frankel - Dougherty Glen Mattson - Ladenburg Thalmann Sameet Sinha - B. Riley Mike Latimore - Northland Capital Markets.

Greetings and welcome to Brightcove Second Quarter 2018 Earnings 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. I would now like to turn the conference over to your host, Brian Denyeau.

Please go ahead..

Good afternoon and welcome to Brightcove's second quarter 2018 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 Jeff Ray, Brightcove's Chief Executive Officer; and Rob Noreck, Brightcove's Chief Financial Officer.

During the call we will make statements related to 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 third fiscal quarter of 2018, and the full year 2018.

Expected profitability and positive cash flow, our position execute on our go-to-market and growth strategy; our ability to expand our leadership position, our ability to maintain and up sell 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 us 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 material risks and other important factors that could affect our actual results, please refer to those contained in the most recently filed Annual Report on Form 10-K and as updated by our other SEC filings. 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 close today, which can be found on our Web site at www.brightcove.com.

In terms of the agenda for today's call, Jeff will provide a summary review of our financial results and update on our operations and review of our strategy. Rob will finish with additional details regarding our second quarter 2018 results, as well as our outlook for the third quarter and full-year 2018. With that, let me turn the call over to Jeff..

Thank you, Brian. And thanks to all of you for joining us today. Brightcove delivered a solid second quarter performance that reflects our ability to execute against our large and growing market opportunity.

To quickly review our financial results for the quarter, we delivered second quarter revenue of $41.7 million, which was at the high-end of our guidance. Adjusted EBITDA was a loss of $660,000, which exceeded the favorable end of our guidance and our recurring dollar retention rate was 95%.

Now that I am about 100 days into my tenure as CEO, I wanted to spend a few minutes reviewing the high level takeaways I've learned and then provide some insight into the changes we are making to take our execution to the next level.

First I have confirmed what I learned during my due diligence process about the terrific breadth and depth of our products. Simply put Brightcove has the best platform and purpose built cloud solutions that help enterprises and media companies leverage the power of digital video.

The team has done a great job in recent years developing new solutions and platform enhancements that I believe can drive faster growth over time. In addition, we will be able to leverage these prior investments to quickly bring additional purpose built solutions to market.

Along with market leading products, it is clear to me that Brightcove's employees have the best understanding and deepest domain expertise in the market on how digital video can transform customers’ businesses. I believe there was a significant opportunity to better utilize this knowledge and make Brightcove the go to resource for digital video.

While this is a great baseline for the company, we know we can take Brightcove to the next level, which means doing things differently from the past. This desire for change is evident across the company. As discussed on our last earnings call, we will be putting customer success at the heart of everything we do.

That is the lens through which we have evaluated the company over the last 100 days and my primary focus has been to ensure we are organized around that mission. I'm confident the changes we're making will meet that goal and drive improved operational and financial performance over the long-term.

During the second quarter, we engaged a leading go-to-market consultant to review all aspects of our go-to-market operation. This included a thorough review of every aspect of our sales process from demand generation to market coverage, fulfillment and customer success processes.

In addition we took a fresh look at how we are segmenting the market and how our products are addressing the market opportunities we've identified. There were a couple of key takeaways from this process. First, we have determined that there are opportunities to build purpose built solutions for additional segments of the media and enterprise markets.

For example in the media market, there are three distinct types of companies; publishing, broadcasting and native digital companies each of which have product needs that would benefit from purpose built solutions that leverage our core video cloud platform.

Similarly there are at least half a dozen enterprise market segments that would be well served with targeted products to best provide rich video solutions. We believe that bringing additional products to market that directly address these segments can provide greater value to customers and provide additional avenues of growth for Brightcove.

Second, we have determined that our spending levels are appropriate, but that there is a meaningful opportunity to improve the effectiveness of that spend. We can increase both the number of opportunities and reduce the complexity of completing, servicing and renewing customer engagements.

For example, we see a large opportunity to expand our efforts with channel partners. Today, only a small portion of our sales come through the channel. This is a missed opportunity. The customers who work with us love Brightcove and our products, but we know that there is a much larger number of prospects who do not know us.

Building a robust channel program that introduces us to more prospects and speeds our time to market in regions where we don't have a meaningful direct sales presence is a key part of our growth strategy. I have led a successful channel programs in the past and I am confident we can do the same at Brightcove.

In the near-term, we will be making some incremental one-time investments that properly position the company for improved, more profitable growth in the future. We believe these modest investments in the second half of 2018 will start to increase the productivity of our go-to-market efforts in 2019.

To ensure accountability and that we are successful in these efforts, we believe it is necessary to make changes to our organizational structure. The first area that we are focused on is product development. To that end, we recently hired Charles Chu for the newly created role of Chief Product Officer.

Charles joins us from PTC where he served as Global Head of R&D overseeing more than 2000 engineers. And he drove PTC's product transformations into new markets including its highly successful IoT solutions.

In this role, he will manage all of our product management, engineering and cloud operations functions, which we have now pulled together as a single team. As we looked at how we develop and market products, we identified gaps in our processes that have led to inefficient and sometimes ineffective product introductions.

Going forward we will clearly identify the business case, pricing and current customer demand for new products prior to the engineering team starting development. This will ensure high quality engineering work that is done on-time, on-budget and provides a great customer experience.

Having a single executive responsible for each of these elements will ensure accountability and improve alignment across the company. Charles joins the product organization that has a long history of developing great solutions.

This was most recently validated in a new report out from Aragon research that named Brightcove a leader for enterprise video.

We believe this leader positioning among a total of 17 providers examined confirms our innovation in the market by creating a single video platform for all used cases across the entire enterprise both external marketing and internal employee communications.

We will continue to evaluate our organizational structure and look to identify any additional changes that can improve efficiency and productivity in all aspects of our operations. It's important that we continue to execute well and I'm encouraged by strong performances in parts of the business.

In particular, we had strong up sell activity in the quarter specifically with a number of expanded engagements with customers in Asia Pacific. From a media perspective, the quarter highlighted three positive trends worth mentioning.

First, we a saw strong growth among the existing customers around the world, this growth spans all market segments, broadcasters, digital native services and publishers. Examples of this include Fox, Discovery, Next Interactive, TV New Zealand and Reelz among others.

The growth in publisher business is particularly interesting given the economic pressures many are encountering. Our publishing focused video solutions are clearly resonating with customers such as Singapore Press Holdings, Prometheus Global Media LLC, the Indian Express and others who are using us to expand monetization opportunities.

Second, we see growing adoption of many of our new products including CAE live and SSAI. Next Interactive, TV New Zealand and World Team Tennis are examples of this trend. Third, we saw an increase in the longer term deals which lower revenue volatility and increase predictability.

Soccer United Marketing LLC and [Renae] [ph] are examples of such agreements. On marketing and enterprise, we saw similar trends in our enterprise business. During the quarter, we continued our momentum helping marketers leverage the power of video.

We signed deals with Houghton Mifflin, American Academy of Orthopedic Surgeons, Rolls Royce Motorcars Incorporated and others. In addition, deals with AON, EMC and Intercontinental Exchange among others demonstrated how companies are utilizing video for internal communications, training and other internal uses.

And we were pleased to see strong retention across all market segments and geographies as we renewed contracts with companies such as AON, LGS, Lush Cosmetics, Tourism Australia and Endeavour Drinks Group. Our PLAY customer events were another highlight of the quarter.

In May, we hosted 500 customers and prospects at our 8th annual conference in Boston and over 30% increase from last year's attendance. And in early July, we had over 360 customers and prospects join us for PLAY Tokyo, a 25% increase over last year.

Both events showcase the impact of Brightcove solutions are having for our customers businesses provided a preview into our product roadmap and offered great opportunities for networking and relationship building. PLAY has become the go-to-event for companies looking to learn from the experts how to leverage the power of video.

At these PLAY events and in subsequent travel and communications, I have met face-to-face with over 75 customers since joining the company. I have been impressed by the sophistication of their video usage and encouraged by how they view Brightcove as their strategic partner.

I am more convinced than ever that there was a huge market opportunity for us to attack. We are focused on maximizing this opportunity and ensuring we are engaging customer interest with the right messaging, go-to-market efforts and products that deliver even greater value.

To summarize, we made tremendous progress in the second quarter in better positioning the company for long-term success. We are still in the early stages of a large and growing market opportunity where Brightcove has established clear market leadership.

I look forward to providing further updates on our progress as we move through the second half of the year. With that, let me turn the call over to Rob to walk through our results.

Rob?.

Thank you, Jeff and good afternoon everyone. I will begin with a detailed review of our second quarter results and then I'll finish with our outlook for the third quarter and the full year. Total revenue in the second quarter was $41.7 million, which was at the upper end of our guidance range.

Breaking revenue down further subscription and support revenue is $37.9 which was up 7% year-over-year. Professional services revenue was $3.8 million which was up 17% year-over-year. On a geographic basis, we saw strong performance across all regions. We generated 55% of our revenue in North America during the quarter and 45% internationally.

Breaking down international revenue a little more, Europe generated 16% of our revenue and Japan and Asia Pacific generated 29% of the revenue during the quarter. We see continued momentum in Japan and Asia Pacific both with new customer wins and expanded engagements with existing customers.

From a vertical perspective, our media business represented 54% of our revenue in the quarter and our enterprise business represented 43% of our revenue, while volume business represented the remaining 3%. Let me now turn to the supplemental metrics we share on a quarterly basis.

Our recurring dollar retention rate in the quarter was 95%, which was in line with our target range of low to mid 90s. We are pleased with our retention performance in the quarter, which reflects the positive impact of our media repricing efforts and the value we are delivering to customers.

We are focused on maintaining and hopefully improving our retention rates over time. However, we continue to target our historical retention rate in the low to mid 90s. Our customer count at the end of the quarter was 3,936 of which 2,204 are classified as premium customers.

Looking at our ARPU within our premium customer base, our analyzed revenue for premium customer was $75,000 which was up 7% year-over-year and excludes on entry level pricing for starter customers which averaged $5,000 in annualized revenue.

Looking at our results on a GAAP basis our gross profit was $25 million, operating loss was $5 million and loss per share was $0.16 for the quarter. Turning to our non-GAAP results, our non-GAAP gross profit in the second quarter was $25.7 million compared to $22.8 million in the year ago period and represented a gross margin of 62%.

Subscription and support revenue represented approximately 91% of our total revenues and generated a 67% gross margin in the quarter up from 65% in the second quarter of 2017. Non-GAAP loss from operations was $1.8 million in the second quarter compared to a non-GAAP loss from operations of $5.5 million in the second quarter of 2017.

Adjusted EBITDA was a loss of 660,000 in the second quarter compared to a loss of $4.3 million in the year ago period and above the high-end of our guidance range for the quarter. The adjusted EBITDA was driven in part by favorable subscription and services gross margins as well as the timing of sales and marketing spend.

Non-GAAP loss per share was $0.07 based on $35.5 million weighted average shares outstanding. This compares to a loss per share of $0.16 on $34.2 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 $25.7 million.

During the second quarter, we use $681,000 in cash flow from operations and free cash flow was negative $1.9 million after taking into account $1.2 million in capital expenditures and capitalized internal-use software. I'd now like to finish by providing our guidance for the third quarter and full year 2018.

For the third quarter, we are targeting revenue of $41.6 million to $42.1 million including approximately $3.7 million of professional services revenue. From a profitability perspective, we are expecting a non-GAAP operating loss of $1.2 million to $1.7 million and adjusted EBITDA loss of $100,000 to $600,000.

Non-GAAP net loss per share is expected to be in the range of $0.04 to $0.05 based on 36.2 million weighted average shares outstanding. Turning to our outlook for the full year 2018, we are raising the low-end of our revenue range and now expect revenue of $166.5 million to $168 dollars.

This includes approximately $14 million of professional services revenue. In terms of profitability, we are adjusting our outlook to a non-GAAP operating loss of $1.3 million to $2.8 million and adjusted EBITDA of $1.5 million to $3 million.

In addition, we now expect non-GAAP net loss per share of $0.06 to $0.10 based on 35.8 million weighted average shares outstanding. Our updated profitability outlook reflects one- time investments we have decided to undertake around our go-to-market and product development efforts.

We believe these investments are essential to better positioning the company for improved growth that is more profitable. We strongly believe these investments will provide substantial improvements in the business and drive shareholder value over time. For cash flow, we expect full year free cash flow in a range of breakeven to $2 million.

To summarize, the Brightcove delivered solid second quarter results that demonstrate the value of our solutions provide to customers every day. We are making good progress in driving change across the business and are increasingly confident the actions we are taking in 2018 will help drive faster more profitable growth going forward.

With that, we will now take your questions. Operator, we are ready to begin Q&A..

At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Tom Roderick of Stifel. Please proceed with your question..

Hi. It's actually Parker Lane on for Tom. Thanks for taking my question. You guys mentioned the enterprise segment as part of your go-to-market review, you said there's about a half a dozen segments there.

I was wondering if you could dig in on a few of them at a high level sort of address how well your product set in the enterprise and marketing space is suited for those individual segments.

And then, what work would potentially need to be done in the back end and sort of a timeline for how long it would take to effectively address that market? Thanks..

Yes. This is Jeff Ray. Thanks for the question. It's early. The segmentation work is underway. We're encouraged by what we're seeing.

The good news is that having a platform that is a sound platform for all video and being able to plug in APIs that are purpose built or unique that with a very strong services team that can present a unique solution for the customer makes us a very attractive process to go through. I'm also encouraged by how our sales people have responded to that.

They see that as an opportunity for us to get more precision around those customers that are most likely to buy from us in the shortest period of time with the least amount of risk. My sense is the segmentation work will be done by the end of the third quarter..

Got it. And then, as we think about the opportunity for the partner network to expand considering there's pretty different buyers in the media and enterprise front. What are some of the organizations that you're identifying as potential partners and who is that responsibility going to fall under inside of the organization. Thanks again..

Thank you. We've got good feedback from our Asia subsidiary where really on their own initiative they launched a partnership strategy. The individual who crafted that has spent a lot of time with me personally and with the leadership team.

The work that we're doing on that initiative is consistent with the other tracks of our go-to-market initiative efforts. And it's getting all the eyes of the leadership team. In terms of specifically which kinds of companies we will partner with.

We'll take our lessons and our guidance from the experience that we've had in Asia and we'll apply that around the world..

Our next question comes from Steve Frankel of Dougherty. Please proceed with your question..

Good afternoon. Jeff, I'd like to try to understand better the timetable for the payoff from these investments. I understand wanting to spend some money in the short run.

But when do you think we'll start to see this impact, the growth rate in revenue for example?.

Good question. I think the key principle here that I really want to stress is the same principle we've used here in the company and that is this is all built on a framework of identifying very specific ROIs.

We are going to stay away from whatever things we had done in the past in finding things that really look attractive and interesting and exciting. And instead, it's going to be put on a framework of how much of this can we sell by when and at what cost at what risk.

So as you would imagine in any good well-disciplined business doing there as you put those together you will find some pay-offs that are early, some that are later, some that that have a very, very narrow scope of growth, some that have a longer scope of growth. And we've got a good matrix in place that we will use to make those evaluations..

And traditionally you guys rolled out new product innovations at PLAY and then they would ship six months or so later sometimes a little longer than that.

Do you anticipate the same kind of product cycle around these new go-to-market products or is this something that you could get to market quicker than you traditionally have?.

We're no longer going to launch products based on some kind of an events calendar. We're going to launch products again based on sound ROI. And we also will launch products based on a higher level of rigor and discipline within the R&D organization. It's why we brought Charles Chu in. He's got a history of being able to do this well.

So this will no longer be event driven, it will be driven again by the priorities triggered by ROI. And it will be owned by a dev team that will deliver products on time to our internal schedule at the proper quality and performance levels on day one..

Okay. And then, one question related to guidance, so with a slight tweak to revenue looks like you had fall a little shy of that previous goal of hitting double-digit revenue growth in the subscription and support segment.

Was there something in particular that happened, is it just overall conservatism and you had flat subscription in support revenue in Q2 as opposed to the expectation for a little bit of sequential growth..

Yes, Steve. Thanks for the question. I think overall we are being a little bit conservative in the guidance that we're putting out there.

Also, I think there's a little bit of timing there you can see that the services revenue is up and some of it is going to be the license that follows those large services engagements and we're being a little conservative on the timing there..

Okay. Thank you..

Our next question comes from Glen Mattson of Ladenburg Thalmann. Please proceed with your question..

Hi.

Can you hear me?.

Yes. We can hear you fine. Absolutely..

Yes. So just related to the last question on the guidance -- the service revenue was a little higher this quarter and then the service guidance for the year is a little higher so, it nets out to license growth that is a little weaker. I guess I'm a little curious about the bookings, the company used to talk about at least characterize the bookings.

Can you say how those were during the quarter?.

Yes. We had a solid bookings quarter and we are still anticipating hitting the double-digit growth for 2018..

Okay. Because I guess we're just still anticipating double-digit subscription growth you said for the 2018..

No. That was double digit bookings growth for 2018..

Double-digit bookings growth. Okay. Yes, I guess I'm just curious as to why retention rate being higher and bookings being solid why that's not translating into better subscription growth. But maybe that's something that is going to come down the line maybe you can discuss that..

Yes. I think you're right. Some of it's going to be timing and it's going to come down the line..

Okay. Great. That's it for me then. Thanks..

Our next question comes from Sameet Sinha of B. Riley. Please proceed with your question.

Yes. Thank you. Couple of questions here. So Jeff I guess the first one would be -- as you've met these 75 customers that you characterized in your [indiscernible] what were the kind of the job, two or three things that they spoke about, what sort of changes do they expect, what sort of new products can they expect from Brightcove.

You can talk about that. And second thing would be you spoke about kind of consolidating the platform -- a single platform for multiple used cases. I think your previous management team spent quiet a bit of time in sort of modularizing the platform, splitting it apart.

So that the used case can -- depending on the user, they can choose what the specific module they wanted to buy.

So can you help us think about the direction your new product development will take and should we expect for the consolidation of the products? And if so, why - are you seeing more cases where your customers are buying the entire set rather than specific pieces?.

Okay. Thanks Sameet. I'll take part of this and I'll also invite Rob to jump in and add a little bit more color on it. In terms of recurring themes from customers, the most important one is they are really counting on us. What we are doing is mission critical for them.

It is impactful to their business and they -- that was the first message they delivered. The second message they delivered was to continue to find new innovative ways to help them grow and expand and engage. They really see this as the critical essential way to reach and to expand. So we're very encouraged by it.

But it was also a very, very clear call to action to me to go faster, go deeper, go broader. Don't let up pick up the pace. It's very exciting to see the ways they're using video to impact things. When I was in Japan I met with the McDonald's digital management team.

They are using video to reach tens of thousands of employees up and down across the entire country and really pulling it into a much more single harmonious team.

The CEO is an American who does not speak English and yet she uses a video message each month to all the employees with Japanese subtitling to deliver a very personal message just very, very powerful ways that I see that they're making a difference really in the companies and their lives. So a very clear call to action to me.

Second on the platform, I really can't comment on what might have been said or done in the past. The point here is not to split apart the platform into modules but rather to use the common elements in the platform that are needed for all video intake and delivery.

And then have a more personal layer on top built on APIs that are more purpose built for the unique needs of an institution. And we believe that more and more institutions are -- will care more and more about that personalization. I feel pretty encouraged by the strategy that the team had taken in the past on doing that.

Certainly one of Charles first mandates is to crawl through and look at the model, the products, the architecture how we're doing things and just to ensure that we are positioning ourselves for the kind of growth strategies that we want to lay out.

Rob do you want to add anything to that?.

Yes. Just a second what Jeff said we're not -- the underlying consolidated platform that he was referring to is really the core video technology that underlies all of what we do.

And what we're talking about on the modules as building out additional features and functionality similar to the audience model that's purpose built for marketers and looking at those other segments and what purpose built modules can we build on top of that to get video into the hands of more broader segments..

Great. Thank you..

Our next question comes from Mike Latimore of Northland Capital Markets. Please proceed with your question..

Great. Thanks a lot.

Just -- how about overage, do you have a number on what overage was in the quarter?.

Yes. It's 2.2..

Okay, great.

And then, in terms of just the onetime cost -- by one time do you mean just in calendar year '18, is that the way to think about it or is it pacifically in third quarter?.

Yes. It's going to be spread over the back 2 quarters of the year. But the important thing here is that it is one time and we're not adding to the run rate of business yet..

And then subscription gross margin, I hope there was some thought, it was up a little bit sequentially.

Does the media repricing give you a little more flexibility to grow subscription gross margin over time?.

Yes. I think the growth in the subscription gross margin is a combination of things. One is, how we are pricing on the media side and what we're expecting to see there as well as our continued efforts to drive costs out of that move fully to the cloud infrastructure..

Okay. And then, just last one, I guess you talked a little bit about just -- encouraged about long-term growth opportunity and there's been some discussion in the past by getting to 10% or so growth.

I guess what would be a successful kind of long-term growth rate or maybe separately, what do you view the market growth rate being here?.

10% is not a very impressive growth rate, Mike, long-term..

Okay.

And what do you think the overall your addressable markets growing in?.

I've seen numbers that I don't have a high confidence in yet to share. But, we can grow with the market and certainly beat 10%..

Okay, great. Thank you..

Our next question is a follow up from Steve Frankel of Dougherty. Please proceed with your question..

Just a follow-up again on the bookings.

My memory was the previous -- let's put guidance in your quote but the language had been around mid teens to better bookings growth for the years? So I would wonder if we're still on track for that or the commitment now is just double-digit bookings growth?.

Yes. Steve, the mid teens booking growth guidance was at the start of 2017. And we wrapped up 2017 roughly at 10% right at the double-digit mark and we guided double digits for this year..

Okay.

So same basic rate that you committed to in a year, you're still committing too at this point?.

Yes..

Okay. Thank you..

Ladies and gentlemen, we have reached the end of our question-and-answer session. I would like to turn the call back to CEO, Jeff Ray for closing comments..

Thank you. Thank you all for joining and participating in this. We are cranking on the third quarter and excited about our prospects. Everyone have a good day. Goodbye..

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation..