Greetings, and welcome to the Brightcove First Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-mode. A brief 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 from ICR. Thank you. You may begin..

Good afternoon, and welcome to Brightcove's first quarter 2019 earnings call. Today, we'll be discussing the results announced in our press release issued after market close. 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'll 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 second fiscal quarter of 2019 and the full year of 2019, 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, as well as 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 our 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 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. Also during the course of today's call, we will refer to certain non-GAAP financial measures.

There's a reconciliation schedule showing GAAP versus non-GAAP results currently available in our press release issued after market close today, which can be found in our website at www.brightcove.com.

In terms of the agenda for today's call, Jeff will provide a summary review of our financial results, an update on our operations and a review of our strategy. Rob will finish with additional details regarding our first quarter 2019 results, as well as our outlook for the second quarter and the full year of 2019.

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

Thank you, Brian, and thanks to all of you for joining us today. We made meaningful progress executing on our strategic plan during the first quarter that we believe will enable Brightcove to deliver significant, consistent and sustainable revenue growth and profitability into the future. Renewal rates remain strong in the first quarter at 95%.

The positive trajectory of renewal rate is an encouraging indication that our products and services are delivering meaningful business value to customers and that the process improvements we have made in our customer service organization are making it easier to do business with Brightcove.

We've built a solid base on which to accelerate growth, and the strategic initiatives and our go-to-market and product development organization start generating improved new business performance. Turning to our financial results briefly for the quarter.

We delivered first quarter revenue of $41.8 million, up 2% year-over-year and above the high-end of our guidance, and adjusted EBITDA was $1.3 million, which was well above the high-end of our guidance and reflects our commitment to profitable growth.

I'd like to take a few moments to review some of the improvements we made to the business during the first quarter, as well as provide an update on the acquisition of Ooyala's online video platform business. From an innovation standpoint, we're making excellent progress on the product roadmap we developed in conjunction with our market analysis.

As you'll recall, we've have identified nine distinct customer end markets that IDC estimates, totaling $1.6 billion in 2016 that will grow at a 17% CAGR to $4.2 billion by 2022. We will initially target four of these segments, including marketing and sales, as well as OTT experiences.

Through this process, we've identified a targeted list of innovations that can leverage the strength of our core platform and could be packaged to address the specific needs of our targeted market segments.

We're confident that this approach, which is based on a rigorous ROI-based methodology will result in products that target the most pressing business needs of customers and drive greater sales.

I'm also pleased to announce that our new focus on timely product delivery is already paying off with 100% of the committed new product features and enhancements delivered on time in Q1. We've been thrilled with the feedback we have received from customers who've seen the preview of our roadmap and we are excited to share our vision with the world.

We also made substantial progress in putting the pieces in place to create a predictable selling model that can deliver breakout growth. We are targeting a multi-billion dollar market opportunity and we need a repeatable sales motion that can effectively target all customers.

We are confident that as we execute on our strategy, we will generate meaningful growth. Our marketing team made significant progress in driving more targeted and impactful demand generation campaigns.

This group is embracing our rigorous ROI-based methodology to identify which demand generation programs are providing the most cost-effective, high-quality leads. In the first quarter, we saw a material increase in our new business pipeline even as we held marketing spending flat.

An example of the marketing campaigns that are proving effective is the recently launched Video Marketing Masterclass. It's an education-based program to help guide sales and marketing professionals on the development of a video marketing strategy to achieve demand generation and e-commerce objectives.

The class includes research and tutorials on developing a video program from content and production to distribution and ROI measurement. It was one of the most popular pieces of content in Brightcove history, demonstrating the increased level of interest and engagement we are seeing for potential new customers.

In our sales organization, Rick Hanson has been a tremendous addition to our executive team as Chief Revenue Officer. In his first few months on the job, he has instilled a sense of urgency, ownership and accountability across our entire sales organization, while ensuring his team is aligned with marketing to drive improved business performance.

He's added top leadership talent, including most recently, Billy O'Riordan as Senior Vice President, International Sales who will lead our sales teams in Australia, Southeast Asia and EMEA. Billy is an experienced sales leader who has held senior sales positions at CA Technologies and AppDynamics.

A key area of focus for Rick is ensuring that our sales organization is aligned with the strategy, market analysis and product roadmap work done over the past year. As part of this process, we are creating specialized sales teams, one, with exclusive focus on retention and another on new business generation.

We believe this new structure will allow us to be more aggressive with our sales activity, while making us more effective in the customer renewal process.

As the new purpose-built solution is released in the coming quarters, we will have a tightly aligned go-to-market across our product, sales and marketing organizations focused on delivering value to a growing number of customers. We have more work to do to get the team enabled to drive the results we know this business can achieve.

But I feel good that we have identified what is already working well in our go-to-market organization. And I believe we will start to see the benefits of the changes we are making in the second half of the year. We are already starting to see traction in the marketplace. Here are some great wins from the first quarter.

From the sales and marketing segment, we're proud to have CaringBridge as a new customer. CaringBridge is a global non-profit organization with the most widely used social network for communicating during an illness or injury through the use of free personal websites to easily share updates.

CaringBridge will use Brightcove's technology on individual users' websites, one of which is created every six minutes. Users can post video updates to their community and allow members of the community to post on their pages.

Adding Brightcove to CaringBridge site allows for more personal communication and enables the organization to bring the personal and human connection to the healthcare journey through the power of video. The OTT business is a growing and vibrant market. We intend to be the market leader.

A great example is MMTV Limited, a well-known and respected news broadcaster in Southern India, which expanded its relationship with Brightcove to include OTT Flow. The company is planning to launch an individual OTT platform for their property Mazhavil Manorama across platforms and devices.

MMTV does not have a dedicated technical team to manage the development and coding of the apps. Instead they chose to rely upon Brightcove's domain expertise to meet a quickly approaching June launch.

The Brightcove team proposed OTT Flow to fulfill the company's list of requirements, which also included integration with a local payment system and existing SSL. As a successful video cloud customer for many years, we are thrilled MMTV Limited trusted Brightcove to take this next step in their video strategy. Turning to Ooyala.

We were excited to close the acquisition of Ooyala's OVP business on April 1st, which affirms our leadership in the online video industry. We were thrilled to welcome Ooyala customers to the Brightcove family. We have been in contact with them, and I have had an opportunity to engage with more than two dozen personally. Feedback has been encouraging.

Customers are excited to have the Number one OVP provider as their partner and are eager to see our roadmap to learn how we will help them get even more return from their video spend. I was recently joined by several members of our senior leadership team in Guadalajara, Mexico at our new office where more than 80 former Ooyala employees are located.

I was inspired by their passion for video and their singular focus on helping our customers succeed. This is a group that is thrilled to be part of the Brightcove team and each person committed to joining us in our journey for breakout growth.

For example, several people sought me up and noted that because they were two hours behind Eastern daylight savings time, they would now come to work two hours early to align with the Boston teams.

The power in us choosing to do a carve-out of the OVP talent and assets means that we are immediately adding skills and motivated engineering, product, marketing, sales, finance and customer support resources to our Company, giving us the chance to accelerate our growth initiatives.

We're very pleased with what we have seen in the first few weeks and the opportunities Ooyala will provide for Brightcove. We're making good progress on our initiatives to deliver breakout growth. We're driving change across all aspects of the business that will increase the value Brightcove delivers for customers.

We will leverage our heritage as the leading experts in video with an expanded easy-to-use product portfolio and a go-to-market organization that is aligned with our strategy. Finally, I would like to thank our employees for their faith in our strategy and our execution plan for growth.

Brightcove is full of smart, dedicated people who believe in all things video. I appreciate their excitement to embrace the changes we are making so that we can reach our full potential as a company. With that, let me turn the call over to Rob to walk you through the numbers.

Rob?.

Thank you, Jeff and good afternoon everyone. I will begin with a detailed review of our first quarter and then I'll finish with our outlook for the second quarter and the full-year 2019. Total revenue in the first quarter was $41.8 million, which was modestly above our guidance range.

The outperformance was driven by overage revenue that came in above the $1.25 million target we noted on our fourth quarter earnings call, driven by a few specific events. Overages continue to be variable and below our historical trend, so we remain comfortable with our $1.25 million quarterly target for the remainder of the year.

Breaking revenue down further, subscription and support revenue was $38.9 million and professional services revenue was $3 million. As discussed on our last earnings call, we believe backlog will be a useful metric for investors to track our performance executing on our strategic initiatives.

We define backlog as the aggregate amount of committed subscription revenue related to future performance obligation. Breaking this down further, we believe looking at 12-month backlog is the most useful backlog metric to track, as it eliminates noise from changes in duration and the unpredictability of large multi-year transactions.

In the first quarter, our 12-month subscription backlog increased to $92.1 million during the quarter. This was up $5.6 million or 6% from the 12-month subscription backlog at the end of the year-ago period. On a geographic basis, we generated 52% of our revenue in North America during the quarter and 48% internationally.

Breaking down international revenue a little bit more, Europe generated 15% of our revenue and Japan and Asia-Pac generated 33% of revenue during the quarter. Let me now turn to the supplemental metrics we share on a quarterly basis.

Our recurring dollar retention rate in the first quarter was 95%, which was in line with our target range of low-to-mid 90%s. The strength in the quarter was driven by strong growth renewals. We are pleased with the performance in the quarter and the impacts our renewed focus on customer success is having on retention.

Our customer count at the end of the first quarter was 3,696, of which 2,227 were classified as premium customers.

Looking at ARPU within our premium customer base, our annualized revenue per premium customer was $78,000, which was up 4% year-over-year and excludes our entry-level pricing for starter customers, which averaged $4,600 in annualized revenue. Please note these metrics do not include any impact from the Ooyala transaction, which closed on April 1st.

Looking at our results on a GAAP basis, our gross profit was $25.1 million, operating loss was $4.8 million and loss per share was $0.14 for the quarter. Turning to our non-GAAP results. Our non-GAAP gross profit for the first quarter was $25.5 million compared to $24.6 million in the year-ago period and represented a gross margin of 61%.

Subscription and support revenue represented approximately 93% of our total revenue and generated a 55% gross margin in the quarter compared to a 66% gross margin in the first quarter of 2018. Non-GAAP income from operations was $19,000 in the quarter compared to non-GAAP loss from operations of $74,000 in the first quarter of 2018.

Adjusted EBITDA was $1.3 million in the first quarter compared to $896,000 in the year-ago period and above the high-end of our guidance range for the quarter. The profitability outperformance was driven primarily by the better-than-expected overage revenue.

Non-GAAP net loss per share was $0.01 based on 36.7 million weighted average shares outstanding. This compares to an earnings per share of $0.00 on 35.7 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 $28.9 million.

During the first quarter, we generated $263,000 in cash flow from operations and free cash flow was negative $927,000 after taking into account $1.2 million in capital expenditures and capitalized internal-use software. Subsequent to the end of the quarter, we closed the acquisition of Ooyala's OVP business.

The purchase price was approximately $15 million, which consisted of $5.9 million of cash and $1.1 million newly issued Brightcove shares. I'd now like to finish by providing our guidance for the second quarter and full-year 2019.

For the second quarter, we are targeting revenue of $45.5 million to $46 million, including approximately $2.3 million of professional services revenue. From a profitability perspective, we expect a non-GAAP operating loss of $1.8 million to $2.3 million and adjusted EBITDA loss of $500,000 to $1 million.

Non-GAAP net loss per share is expected to be in the range of $0.06 to $0.07 based on 37.9 million weighted average shares outstanding. As a reminder, the second quarter consistently has higher sales and marketing expenses due to our PLAY user conference.

Turning to our outlook for the full-year 2019, we are updating our revenue guidance to a range of $183 million to $186 million. We continue to forecast overage revenue of approximately $1.25 million per quarter for the remainder of the year or $6 million for the full year.

In terms of profitability, we expect non-GAAP operating income of $2 million to $4.5 million and adjusted EBITDA of $7.2 million to $9.7 million. In addition, we expect non-GAAP net income per share of $0.02 and $0.09 based on 38.6 million weighted average shares outstanding.

Our updated full-year revenue and profitability guidance includes approximately $14 million of revenue and $1 million of non-GAAP operating income and adjusted EBITDA contribution from the acquisition of Ooyala. For cash flow, we expect full-year free cash outflow in a range of $3 million to break even.

There are two primary drivers to the change in our cash flow forecast. First, as we work against our product roadmap, we will have an increasing capitalized software expense, and second, we will also incur approximately $8.1 million of one-time deal-related expenses for the Ooyala OVP business that were not included in our original guidance.

To summarize, we made good progress on our strategic initiatives to reach our goals of breakout growth and improve profitability. We are committed to making the investments necessary to achieve our objectives, while driving improved productivity across the Company.

We are focused on executing against our plan and feel very confident about our strategy to achieve breakout growth. With that, we will now take your questions. Operator, we are ready to begin Q&A..

[Operator Instructions] Our first question here is from Sameet Sinha from B. Riley. Please go ahead..

A couple of questions I guess, starting with Rob. Rob, if you can help us just think about the margin profile for Ooyala, specifically who are interested gross margin line just so that we are not surprised next time that you report? And in terms of the professional services, it seems like you are bringing down that number quite significantly.

Can you just give us some insight what are you seeing from the marketplace? Is it business that you are pushing away or is it something else? And does this have any indication of what future business could be? And then I have a follow-up..

Yes, sure. So as you can imagine on the Ooyala market, it is somewhat lower than Brightcove's margin that you've seen in the past that's really related to their scale. They are a much smaller company. So we're not going to give specifics around that, but it is a little bit lower.

You'll see the margin come down slightly in the out-quarters as a result of that until we get on to one unified platform. In terms of your PS question, we brought it down. Obviously, we have good line of sight into the PS revenue for Q2.

We're not seeing anything specific in the marketplace right now, more of a mix of deals that we sold in the quarter..

And in terms of the pro forma number that you provided for Ooyala, you said $1 million in operating income or is it adjusted EBITDA?.

Yes, both. As of right now, we didn't pick up any depreciation or any material fixed assets..

And then a final question. So you hired about 100 people from Ooyala, 80 in about -- in Mexico.

How many of these are -- kind of help you fill your open requisition, reqs that you had at Brightcove versus some -- some of them would be incremental to your base?.

Yes, I think from the standpoint, it's a good mix. We certainly had open reqs at Brightcove and we picked up some of those skills from the GDL site in Ooyala acquisition. And then it also provides additional capacity for us to accelerate some of the roadmap items that we had out there..

Our next question is from Steven Frankel from Dougherty. Please go ahead..

I wonder if you might start with some color on bookings. Last quarter, you talked to us about the fact that they were disappointing.

You did say the pipeline looks better, but maybe a little more specific color around how bookings shaped up in Q1 and how you're feeling about bookings in Q2?.

Thanks for making the call. Yes, we no longer disclose on bookings. I'll tell you that we continue to feel very, very good about the second half. We feel very, very good about all the things that sales is doing and that marketing is doing. We saw some good positive momentum and we feel really good about our longer-term goals for the year.

And if you remember Steve, we decided not to guide on bookings, but we'll continue to report on the backlog, which the 12-month backlog was up 6% year-over-year..

And yes, I understand that.

Again, I was looking for some more color as opposed to numbers, but on that backlog presentation, what was the number in Q4? You gave us the year-ago, but could you give us the previous quarter?.

Yes, it's $90.7 million. So it was up $1.4 million, about 2%..

Okay. And then Jeff, one of the areas of low-hanging fruits you identified fairly early on was a VAR channel.

Is that still on the target list and how quickly might you be able to execute on that, if it is still something you are looking to do?.

Yes, it is still key to the growth strategy. We don't think it's going to be impactful until 2020. We've been saying that all along. And that is more on -- even though we don't talk about bookings, that's more on the bookings/backlog. I feel good about the progress that we've made.

We have launched an online portal that is automated, it makes it very easy for applicants to register and become resellers or other kinds of partners. We've actually identified several layers of partnership.

We also now have an online academy that makes it easy for them to get the skills that they need to represent us well and to sell and support our products.

Also as in the side, it just so happened that part of Ooyala was doing a pretty good job with partners and there was a very strong leader there who had very, very good relationships beyond just the traditional resellers with some of the major OEMs out there. And those introductions are happening right now.

He's thrilled to be part of the team and he's doing a great job of accelerating our effort there..

And then Jeff, you had talked about holding expenses flat, OpEx flat in 2019.

Maybe update us on what kind of expense level is factored into the full-year guidance and what's attributable to Ooyala versus what's the core business if you want to get that granular?.

Yes, so when you think about what's attributable to Ooyala, we guided to a $14 million revenue number and a $1 million op inc, adjusted op inc and adjusted EBITDA number. So you got about $13 million of expenses in there with the rest of the business holding fairly constant..

And again, that's for the remaining -- remainder of the fiscal year?.

Yes..

[Operator instructions] The next question here is from Mike Latimore from Northland Capital Markets. Please go ahead..

I guess on the Ooyala, I guess all that -- pretty much all that $14 million will go into subscription revenue, is that right?.

Yes..

Okay.

And should we think of the revenue stream at Ooyala as being stable at this point or growing?.

Yes, fairly stable. Obviously, we see opportunity with those customers as we launch new products and fill out our roadmap and we build out the unified platform..

Yes, this is Jeff. We've done a pretty good job of selling back into the base and we see an opportunity to engage with those customers and up sell -- sell additional products and offerings that Ooyala could not deliver. I personally talked to more than two dozen of these customers and the sentiment has been very, very encouraging.

If they're nervous about anything, it's about the future of the platform.

We've guided that there will be a single unified platform in the future that we are taking this opportunity to crawl through all of the apps, if you will, that make up the Ooyala product suite and if there are really great apps there that we don't have, we want to add those to the target unified platform. They're encouraged by that.

Their big concern will be the disruption for going through the migration. We've got the best global services team in the world. Before this transaction happened, we were moving one to three Ooyala customers a month. And so, our services team already knows how to move them and our cloud ops team knows how to migrate data.

So this will not be something new to us..

And then among your enterprise customers, are there any features that are particularly in demand, Social, Live or [Indiscernible]..

I can't think of anything in particular. I know that Live is getting a lot more attention there. They're starting -- as these customers mature and they're all at various stages of maturity, they are starting to understand the value of Live. It's one of the reasons why I commented on the recognition that we got at the NAB event in Las Vegas.

Demand for OTT is very solid. That's growing and we'll be talking about that more at the PLAY event in May..

This concludes today's teleconference, I'm sorry, this concludes the question-and-answer session. I'd like to turn the floor back to Mr. Ray for any closing comments..

Thank you. Thanks everyone for dialing in. It was a great quarter. Again, we feel good about the momentum that we built in the first quarter and how positioned we are for the rest of this year. Ooyala is indeed a significant catalyst and we're excited about those customers and those employees being part of the family.

They really do believe in the power of video. They're very excited about contributing to our growth. We know that strategy is sound. We know that it's working. All of the feedback with customers has been very encouraging and we intend to continue to generate profitability and cash flow during the year. Thank you everyone. Have a good day..

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