Greetings, and welcome to the Brightcove Second 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. Thank you. You may begin..

Good afternoon, and welcome to Brightcove's second 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 third fiscal quarter of 2019 and the full year of 2019, expected profitability and positive free cash flow, 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 second quarter 2019 results, as well as our outlook for the third quarter and the full year of 2019.

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

Thanks, Brian. And thanks to all of you for joining us today to discuss our second quarter results. I'm pleased with the progress made during the quarter on our strategic initiatives.

We are increasingly confident that the actions we're taking in 2019 will enable Brightcove to deliver significant, consistent and sustainable revenue growth and profitability in the future. There's more work to do, but we're clearly validated that the strategy we're pursuing will be successful.

Let's start by briefly reviewing our financial results for the quarter. We delivered second quarter revenue of $47.6 million, up 14% year-over-year and above the high end of our guidance, and adjusted EBITDA was negative 0.1 million, which was above the high end of our guidance.

I'd like to spend a few moments providing more detail about the progress we've made on our strategic initiatives, as well as an update on the acquisition of the Ooyala's online video platform business. As discussed on prior call, a key focus is building a predictable selling model that can effectively target all customers.

Last quarter, we shared with you that we have introduced specialized sales teams, one with an exclusive focus on retention and another on new business generation. We're encouraged by the positive response from our customers and sales teams.

As a result, in the second quarter, we saw a healthy mix of transactions, including a material increase in the number of six figure wins. And our overall deal size grew materially, driven primarily by larger land transactions, as well as upsell activity into the install base.

A great example of the progress we're making is in Europe, which had its best quarter in years. With the recent change in sales leadership, we have attracted more sales talent into the business. This has provided an opportunity to quickly implement our new, more focused sales strategies.

To deliver such strong results while in the midst of implementing these changes is a credit to the talent of this team. We had an eventful and productive quarter.

Besides hosting play, our Annual User Conference that I will discuss in more detail, we also had a significant presence at NAB where we live streamed the NAB show for the eighth year in a row, and Brightcove Live received the future Best of Show award from TV technology presented at the 2019 NAB show.

In addition, we completed our account segmentation analysis to support a more targeted, high ROI marketing program to support breakout growth. Finally, we had a great new talent to the marketing team with the addition of Emma Vanstone-Booth as our new Vice President of International Marketing.

Working closely with our Chief Marketing Officer Sara Larsen, Emma would be responsible for driving brand awareness and increasing high quality pipeline growth outside of the Americas. Ensuring a consistent demand generation process in every region is an important part of our strategy to deliver broad based growth.

I would now like to highlight some great wins from the second quarter that reflect the positive momentum we have in the market. Egyptian Media Group is Egypt's largest media company with a range of broadcast and publisher brands within its operation. During the quarter, it launched Watch It, Egypt's first dedicated OTP service.

The service is available on desktop, iOS and Android devices and will provide Egyptian audiences access to a range of on-demand programs and films. It also enables users to live stream linear broadcast channels, as well as tune in for live sports events, like the Africa Cup of Nations that took place earlier this month.

Egyptian media selected Brightcove due to the reliability of our platform and a positive recommendation from its system's integrator. The Cato Institute, one of the world's largest Think Tanks, chose to replace and consolidate its existing video tech stack in conjunction with their use of Drupal.

As part of this process, Cato standardize on to Brightcove and displaced a variety of other competitive players. This consolidated stack will provide a seamless workflow that will integrate into Drupal and HubSpot, and Greatland has their ability to produce live content.

Max Mara, one of the largest fashion houses in Europe, selected Brightcove as its online video platform. This was a competitive displacement, due to our superior player performance and tight integration with Salesforce.com.

This customer will be using Brightcove to power video on the landing page of its website and for product videos, as well as live streaming various fashion shows from around the world. And a great new win for us in the sports tech space is FanCode from the house of Dream11, India's biggest fantasy sports platform with over 70 million registered users.

FanCode is a multi-sport aggregator platform for the avid sports fan offering a wide spectrum of content, commerce and community engagement. FanCode selected Brightcove video, cloud and Brightcove Live in order to power online video on their mobile app. I was recently in India and we are seeing tremendous interest from prospective customers.

The combination of low handset costs, reliable broadband connectivity and a population of more than 1 billion citizens is driving rapid increases in video consumption. According to Nielsen, video streaming accounts for more than 50% of time spent on a mobile phone.

India is a key region for Brightcove in an area where we are making additional investments. The highlight of the quarter was our ninth annual and largest PLAY User Conference, where we hosted customers, partners, prospects and industry leading sponsors.

One of the most exciting aspects of the conference were the presentations made by more than 55 companies about their Brightcove experience, demonstrating the value they derive from their relationship with us, and the value we provide to their video strategies.

The key theme at PLAY was breakthrough, emphasizing the critical role that video has in helping our customers, specifically developing stronger personal connections with their target audiences to drive higher engagement and ROI incorporating cutting edge technology into their businesses, and helping learn how to invoke change and take risks to advance growth.

This has been a consistent theme we have heard from our customer advisory boards. Customers increasingly recognize that generating engaging video content with new technology is what drives value in their business, not developing and maintaining their own video delivery platform.

At PLAY, we reviewed our entire product roadmap and vision, including the use cases and purpose built applications, we will be introducing over the next 12 months. Customer feedback has been extraordinarily positive and demonstrates that we are targeting the most critical business issues facing our customers.

The pace and quality of innovation that clearly reestablished Brightcove's position as the leader in the online video space. A great example of our innovation is the most recent version of our live product, which shift in the second quarter.

Some of the new innovation in this release include new features and functionality for Brightcove Live, our award winning live streaming solution. Included in this release is a new Live to Social feature, which enables customers to live stream directly to Facebook via the Brightcove platform and will be available for YouTube in Q3.

Live to Social enables users to grow and retain viewers by live streaming content to existing audiences in social communities. Overall, I'm very proud of the work we have done to develop and execute on a product roadmap that will greatly enhance the value we can deliver to our customers business.

We are committed to delivering on this roadmap in the coming quarters. By early 2020, we will have the deepest, most powerful portfolio of purpose built products in our history. Before I wrap up, I would like to provide an update on our Ooyala acquisition, which closed at the beginning of the second quarter.

We've gotten off to a strong start and are seeing early positive interest from these acquired customers in Brightcove's comprehensive and reliable platform. We also continue to be pleased with the quality of our newly acquired employees, which is enhancing the depth and quality of our team across all functional areas.

As we move through the second half of the year, our focus will be on migrating these acquired customers onto the Brightcove platform, which will enhance the customer experience and give them access to new capabilities only available through Brightcove.

Summarize, we made substantial progress in the second quarter, setting the stage for Brightcove to deliver faster, consistent and predictable top line growth. We're driving change across all aspects of the business that will increase the value Brightcove delivers for our customers.

This is an exciting time for us and I am confident that we will start to see the positive impact from these changes more fully by the end of 2019. 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 second quarter and then I will finish with our outlook for the third quarter and the full year 2019. Total Revenue in the second quarter was $47.6 million, which was above the high end of our guidance range.

The outperformance was driven by overage revenue of $1.9 million, which was above the $1.25 million target we noted on our first quarter earnings call. Overages continue to be variable, but due to the strength on overages we saw in the last two quarters, we are increasing our overage forecast for the second half of 2019 to $1.6 million per quarter.

Breaking revenue down further, subscription and support revenue was $44.9 million and professional services revenue was $2.7 million. 12 month backlog, which we defined as the aggregate amount of committed subscription revenue related to future performance obligations in the next 12 months was $107.6 million.

This represents a 25% year-over-year increase. We believe 12 month backlog is a useful metric for investors to track our performance on our strategic initiatives. On a geographic basis, we generated 54% of our revenue in North America during the quarter and 46% internationally.

Breaking down international revenue a little more, Europe generated 17% of our revenue and Japan and Asia Pacific generated 28% of revenue during the quarter. Let me know turn to the supplemental metrics we share on a quarterly basis. Our recurring dollar retention rate in the second quarter was 87%, which was below our target range of low to mid 90s.

Recurring dollar retention rate in the quarter reflects lower than typical upsell at the time of renewal. Our customer count at the end of the second quarter was 3,761, of which 2,350 were classified as premium customers.

Looking at our ARPU within our premium customer base, our annualized revenue per premium customer was at $83,500, which was up 11% year-over-year, and excludes our entry level pricing for starter customers, which averaged $4,500 in annualized revenue. Please note these metrics include the impact from the Ooyala transaction.

Looking at our results on a GAAP basis, our gross profit was $26 million, operating loss was $7.1 million and loss per share was $0.19 for the quarter. Turning to our non-GAAP results. Our non-GAAP gross profit for the second quarter was $26.8 million, compared to $25.7 million in the year ago period and represented a gross margin of 56%.

Subscription and support revenue represented approximately 94% of our total revenue and generated a 58% gross margin in the quarter compared to a 67% gross margin in the second quarter of 2018. The declining gross margin is due primarily to the Ooyala acquisition, which operated at a lower gross margin profile than Brightcove.

It is our intention to migrate the Ooyala customers off of that platform and on to the Brightcove platform in the second half of this year. Once that transition is complete, we would expect gross margins to return to the historical levels.

Non-GAAP loss from operations was $1.5 million in the second quarter, compared to non-GAAP loss from operations of $1.8 million in the second quarter of 2018. Adjusted EBITDA was a loss of $130,000 in the second quarter compared to a loss of $660,000 in the year ago period and above the high end of our guidance range for the quarter.

The profitability outperform was driven primarily by the better than expected overage revenue. Non-GAAP net loss per share was $0.04, based on 38 million weighted average shares outstanding. This compares to loss per share of $0.07 on 35.5 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 $21.1 million. During the second quarter, we used $4.1 million in cash flow from operations and free cash flow was negative $5.7 million. After taking into account $1.6 million in capital expenditures in capitalized internal use software.

I’d now like to finish by providing our guidance for the third quarter and full year 2019. For the third quarter, we are targeting revenue of $47 million to $47.5 million, including approximately $2.3 million of professional services revenue.

From a profitability perspective, we expect a non-GAAP operating income of $1.3 million to $1.8 million and adjusted EBITDA of $2.6 million to $3.1 million. Non-GAAP net income per share is expected to be in the range of $0.02 to $0.04, based on 39.7 million weighted average shares outstanding. Turning to our outlook for the full year 2019.

We are updating our revenue guidance to a range of $184 million to $186 million. Given the strong overage revenues in Q1 and Q2, we have increased our overage forecast to approximately $1.6 million of overage revenue per quarter for the remainder of the year, or $7.3 million for the year.

In terms of profitability, we are increasing our full year outlook. We now expect non-GAAP operating income of $3.3 million to $4.8 million and adjusted EBITDA of $8.7 million to $10.2 million. In addition, we expect non-GAAP net income per share of $0.06 to $0.10 based on 38.7 million weighted average shares outstanding.

For cash flow, we continue to expect full year free cash flow in a range of $3 million to breakeven. Summarize, we made good progress on our strategic initiatives to reach our goals of breakout growth and improve profitability.

We are confident the steps we are taking will produce faster, more predictable and profitable growth overtime and significant value for shareholders. With that, we will now take your question. Operator, we are ready to begin Q&A..

Great, thank you. [Operator Instructions] Our first question here is from Steven Frankel from Dougherty and Company. Please go ahead..

Good afternoon, Jeff.

First thing I’d like to focus on is that significant bump in ARPU per premium customer? Could you characterize for me whether that was from one or two very large deals or is this more of the things you’ve been preaching for the last couple of quarters starting to come into play and you’re getting better at executing deals of the kind of start as a bigger number across the spectrum?.

Hey, Steve, this is actually Rob, I’ll take the ARPU question from Jeff. But it’s a combination of two things. One is execution on our side as Jeff mentioned in the script, we had a good increase in that new deal size in the quarter.

And the second piece is the customers that we brought over in the acquisition had a higher ARPU than then what we saw on our side. But we saw the growth on the organic side as well as increase from the Ooyala customers..

Okay.

Could you tell us how many Ooyala customers you brought over?.

That we brought over in the neighborhood of 150..

And just trying to square your guidance with the gross margin pressure from the Ooyala, I guess we should assume that operating expenses kick down a little bit in the back half?.

Yeah, and that’s pretty, pretty true. Historically, those kick down as we get overplay, and we see that variable marketing spend come down. And we also assume that as you know, as we’re working to migrate those customers off, we’re seeing improvement in that gross margin in the back half of the year..

Okay, and how about sales force that at PLAY, you talked a lot about rapidly trying to change out as many sales positions as possible.

Could you give us an update on kind of where you are number of open racks?.

Hey, Steve, it’s Jeff. Yeah, we’ve made a lot of very, very significant progress on changing out the sales team. I think the greatest example of that was EMEA, as I talked about, the go-to-market plan is working there. We did a lot of significant trade outs of talent and yet EMEA had really a fantastic quarter.

North America is slightly behind EMEA in doing those changes, but the changes are essentially now done in North America also. So, we’re very, very encouraged by that. We were also pleased with the activity and the close rates that our sales people had even those who have just joined the company.

So EMEA, the work is done, and it’s already start showing signs of paying off. North America, the work is done and we’re hopeful about seeing that pay off also..

Okay.

And Rob, could you give us the 12 month committed backlog number or a year ago?.

Yeah. That was 630 in 2018, it was 86 million little already 86..

Okay, great. That’s all my questions for now. Let somebody else have a turn. Thank you..

Thank you..

Next question is from Lee Krowl from B. Riley and Company. Please go ahead..

Great. Thanks for taking my question, guys. Just want to get a little bit more detail on the retention rate, obviously a dip down. In the opening comments, you guys kind of talked about some good progress on upsell, but then, obviously with the retention rate at 87 kind of totally different story.

So maybe just a little bit more detail on that front would be helpful?.

Yeah, sure, surely, this is Rob. The retention rate includes only those upsell that happened at time of renewal. So, we saw some growth in the upsell deal size, but we did not have the number of upsells and the growth in renewals that we typically had at the same time that impact the retention rate.

So, while our growth retention rate was in line, it was that net retention rate that wasn’t showing the same kind of strength we’ve seen in prior quarters..

Okay, and then is the expectation to kind of trend back up to the more normalized level or it’s just kind of multi quarter phenomenon?.

Yeah, we’ve got the change in the team in place, we expect our numbers to improve as the retention team starts to take hold, but we expect that to kind of really fit for in the six to 12 months’ timeframe..

Got it. And then just, you’ve heard now for a little over three months, maybe just kind of update on the timeline. I think, on the last call, it was about 12 to 18 months for full integration. Also, just on that front, kind of noticed that the deal related costs went from $8.1 million to $8.6 million.

I know it’s small, but maybe just – is that indicative of some incremental costs you discovered as you’ve begun to combine the two businesses?.

Hey, Lee, it’s Jeff, I’ll go first and then I’ll let Rob wrap it up on the cost side. We’re pleased with the feedback that we’ve gotten from the Ooyala legacy customers. We had a breakout session for them at the PLAY event during the quarter, it was well attended. They got to see the – our products, our features are functionality.

I think what was most telling was when the former Ooyala had a product who is now a Brightcove employee stood up and he said, all the things I wanted to deliver for you while I’d say Ooyala are now available. And we literally had customers coming up saying when can I get started. So, we’re moving up the timeline of adoption.

We think we can move more quickly. We think it’s also in the customers’ best interest to get to our platform, which is more stable, more reliable, more performance. And so, we’re going to be more aggressive in migrating that install base..

Yeah. And to your question, the increase from the 8.1 million to 8.5 million it’s just as we dug in and we started looking at what are the mistake to take to get those customers over, we saw a little bit of a cost into that..

Got it. And then, with the progress you guys are making with the sales force, obviously it’s clear that you’re seeing a quick ROI, or fairly quick ROI from some of these new hires.

As these guys get up to speed, is there also an incremental marketing expense associated with kind of blocking and tackling as they go out to try and attract more deals?.

I don’t – I mean, we are kind of hopeful that the ROI will look good. Normally when you build these models, you expect about a six to 12 month ramp up rate for the new hires.

Early indications are that the sales team, I think through the kinds of people that they’re picking and recruiting into the company, and the onboarding effort says that we will get them productive in less time. I don’t really see any correlation and having to increase marketing spend.

The marketing spend is tied to our market segmentation, and customer segmentation, and account segmentation disciplines. Those are all things that we introduced, really at the beginning of this year. And those disciplines can handle the ebbs and flows of sales reps coming in and out. It’s more market driven..

Got it. Thanks for taking my question, guys..

Thank you..

[Operator Instructions] And as there are no further questions, I like to turn the floor back over to Mr. Ray for any closing comments..

Thank you very much for those of you who dialed in. Thank you. As we shared, we’re feeling good about where we are and where we’re headed. There’s I think a high level of energy and excitement in the company and a sense of excitement, particularly with the new products we will be bringing to market later this year.

For us, it’s all about execution to the plan that we’ve shared with you. And we renew that commitment to that plan. Thank you all, and have a great summer..

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