Greetings, and welcome to the Brightcove Third Quarter 2019 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Brian Denyeau with ICR. Please go ahead sir..

Good afternoon and welcome to Brightcove’s Third Quarter 2019 Earnings Call. Today, we will discuss 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 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 fourth fiscal quarter of 2019 and the full year 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 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 discussions 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 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 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 detail regarding our third quarter results as well as our outlook for the fourth quarter and full year 2019. With that, let me turn the call over to Jeff..

OTT, regional broadcasters, corporate communications, and marketing and demand generation. We achieved a significant milestone in the quarter with the introduction of our first purpose-built solution targeting these high growth markets. Brightcove Beacon, our new SaaS OTT platform.

Brightcove Beacon leverages our extensive OTT experience so companies can quickly and cost effectively launch and deliver premium video experiences across any device and monetize this content in a number of different ways. We launched Brightcove Beacon at the Annual IBC Conference in Amsterdam in September, where it received a lot of attention.

The feedback from prospects and industry experts was incredibly positive and highlighted Brightcove Beacon's unique approach to solving this problem. To accelerate our time to market and leverage our OTT expertise, in the quarter we made a small tuck-in acquisition to acquire some exciting technology that is incorporated into Brightcove Beacon.

We also continue to look for additional opportunities to leverage our deep video expertise. In the fourth quarter, we will be making some modest one-time investments to explore new potential market opportunities that we think could be attractive.

We'll use the same product strategy framework that focuses on identifying segments where we can add the most value to customers. There is a clear willingness from customers to spend and that can expand our TAM. Ensuring our demand generation activities are tightly aligned to our new products is a key priority.

We're in the process of revamping our marketing efforts to focus on these new products and we will be training our entire go-to-market team on these new offerings at the start of the year. We're also focused on raising Brightcove’s brand profile and thought leadership in the market.

We are the clear leaders in video and have better access to data than any other vendor. To that end, we recently launched the Brightcove Global Video Index, which aggregates anonymous data from Brightcove’s media customers globally and views trends on both a global and regional basis.

Some of the key findings in the initial report included market share gains for Android versus iOS and the increasing popularity of long-form and ultra long-form videos. As I discussed earlier, revamping our sales organization is a top priority.

We feel very good at the steps we are taking will result in a predictable selling model that improves our ability to attract new customers and retain and upsell existing customers. As previously discussed, we have specialized our sales organization with dedicated teams focused on new customer acquisition, retention, and selling back into our base.

We've also brought in a number of new sales leaders including most recently a new sales leader for North America and Japan. We're seeing early encouraging signs of progress in certain regions that are the farthest along in implementing our new go-to-market approach.

Our North American media team is making significant progress and had its best quarter in nearly two years. We have completely rebuilt this team in recent quarters and they're seeing good traction with our new product roadmap including the signing of a strategic customer in the third quarter.

EMEA had its second strong quarter in a row and reflects the positive impact we're realizing from the investments that we have made in leadership and sales talent in that region. The new team is much better aligned to our market segmentation and taking a more strategic approach to customer engagement.

Expanding our sales reach via partnerships and through channel is another area of focus. We were pleased to recently announce that we joined Marketo’s LaunchPoint program. We see an exciting opportunity to work with Marketo’s customers who increasingly see the value in video and how it is the most impactful medium in a modern marketing program.

I would now like to highlight some great wins from the third quarter that reflect the positive momentum we have in the market.

The Christian Broadcasting Network, a global multimedia organization focusing on evangelism and humanitarian aid, expanded its relationship with Brightcove in the third quarter as one of the first customers on Brightcove Beacon.

CBN is using Brightcove Beacon to deploy its new CBN Family application, a one stop-shop for news and content that brings together multiple properties. In order to effectively reach their audience, the app has published on seven distribution platforms across mobile, connected TV and smart TV.

National Basketball League is the professional men's basketball league in Australia and New Zealand. Brightcove will power live streaming of the NBL season through their OTT subscription service, NBL TV, as well as all video on-demand for the league in nine associated clubs.

Brightcove Live will help to also deliver live to social following NBL’s recent deal with Facebook for U.S. streaming rights and other syndication opportunities for different markets.

Leading global production and distribution company, Fremantle signed a three-year agreement with Brightcove to power a new screening app solution to help them showcase their content to broadcasters through a B2B OTT experience.

In partnership with Rawnet, who are developing front-end applications on iOS and desktop, Brightcove will provide with a high quality and secure video experience for their buyers around the world.

OONA, a hardware and telco agnostic OTT app that enables telcos to launch their own OTT apps to their mobile subscriber bases without having to manage costly in-house development work was an exciting win in Asia in Q3.

The Brightcove Video platform will underpin the live and on-demand video experience on the OONA platform for Android, iOS and web, as well as provide video advertisements with service-side ad insertion technology for a broadcast-like seamless ad experience.

The service is slated to go live globally with localized services in the United States, Indonesia, Vietnam, and the Philippines and it's positioned to serve approximately half a billion audiences combined. Finally, Cloudera is changing the way it goes to market with video.

The company selected Brightcove to help deliver a new video experience on its website. This win proves that we are delivering the technology and integrations that matter to marketers. To wrap up, Brightcove continues to make progress on our strategic initiatives.

We're confident that the changes we are making across the business will position us to deliver more value to our customers and shareholders. We remain committed to delivering faster, consistent and predictable revenue growth in the future. 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 third quarter and then I will finish with our outlook for the fourth quarter and the full year 2019. Total revenue in the third quarter was $47.4 million, which was near the high end of our guidance range.

Breaking revenue down further, subscription and support revenue was $45.4 million and professional services revenue was $2 million. 12-month backlog, which we define as the aggregate amount of committed subscription revenue related to future performance obligations in the next 12 months was $100.6 million.

This represents a 17% year-over-year increase and a 2% organic 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 53% of our revenue in North America during the quarter and 47% internationally.

Breaking down international revenue a little more, Europe generated 17% of our revenue and Japan and Asia-Pac generated 29% of our 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 third quarter was 85%, which is below our target range of low to mid-90s.

The largest driver was materially lower upsells at the time of renewal than usual, reflecting in part, some of the sales changes Jeff referenced earlier. Our customer count at the end of the third quarter was 3,720 of which 2,362 were classified as premium customers.

Looking at our ARPU within our premium customer base, our annualized revenue per premium customer was $84,500, which was up 14% year-over-year and excludes our entry level pricing for starter customers, which average $4,800 in annualized revenue. Looking at our results on a GAAP basis, our gross profit was $29.1 million.

Operating loss was $2.4 million and loss per share was $0.08 for the quarter. Turning to our non-GAAP results, our non-GAAP gross profit in the third quarter was $29.8 million compared to $25.4 million in the year ago period and represented a gross margin of 63%.

Subscription and support revenue represented 96% of our total revenue and generated a 65% gross margin in the quarter compared to a 66% gross margin in the third quarter of 2018. We are pleased with the sequential improvement in subscription and support gross margin.

We are tracking well to our plan of transitioning Ooyala customers onto the Brightcove platform by the end of the year. Non-GAAP income from operations was $2.8 million in the third quarter compared to non-GAAP loss from operations of $607,000 in the third quarter of 2018.

Adjusted EBITDA was $4.1 million in the third quarter compared to $575,000 in a year ago period and above the high end of our guidance range for the quarter. The outperformance was driven by good sales management and the timing of certain investments that will now happen in the fourth quarter.

Non-GAAP net income per share was $0.06 based on 40 million weighted average shares outstanding. This compares to a loss per share of $0.03 on 36.2 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 $22.6 million.

During the third quarter, we generated $4.5 million in cash flow from operations and free cash flow was $2.4 million, after taking into account $2.1 million in capital expenditures and capitalized internal-use software. I’d now like to finish by providing our guidance for the fourth quarter and full year 2019.

For the fourth quarter, we are targeting revenue of $47.6 million to $48.1 million, including approximately $2.3 million of professional services revenue. From a profitability perspective, we expect a non-GAAP operating income of $2.1 million to $2.6 million and adjusted EBITDA of $3.4 million to $3.9 million.

Non-GAAP net income per share is expected to be in the range of $0.05 to $0.06 based on 39.9 million weighted average shares outstanding. Turning to our outlook for the full year 2019, we are updating our revenue guidance to a range of $184.5 million to $185 million.

This anticipates $7.5 million in overage revenue and $10 million of professional services revenue. In terms of profitability, we now expect non-GAAP operating income of $3.5 million to $4 million and adjusted EBITDA of $8.7 million to $9.2 million.

In addition, we expect non-GAAP net income per share of $0.06 to $0.07 based on 39 million weighted average shares outstanding. Our updated profitability outlook reflects the onetime investments Jeff mentioned earlier. For cash flow, we expect full year free cash outflow in a range of $3 million to $1 million.

To wrap up, we continue to make progress executing on our strategic initiatives. We remain confident we are on the right track to position Brightcove to generate faster, more predictable and profitable revenue growth over time and significant value for shareholders. With that, we'll now take your questions. Operator, we are ready to begin Q&A..

Thank you. We’ll now be conducting a question-and-answer session. [Operator Instructions] Our first question today is coming from Lee Krowl from B. Riley and Company. Your line is now live..

Great. Thank you for taking my questions. A couple of quick housekeeping items. First, just curious what the overage number was and then also contribution from Ooyala in the quarter..

Sure. Overage number was 1.8 million. Contribution from Ooyala was $5.9 million..

Got it. And then just on the Ooyala front, we saw some nice sequential improvement in gross margin.

Would you expect kind of leveling out of the gross margin improvement? Or are there – is there still kind of some opportunities as you continue to further integrate Ooyala customers?.

I think there's some opportunity, but it will be in the long-term. I don't really see anything happening in the short-term..

Got it. And then you guys kind of alluded to perhaps a modest headwind related to the sales force restructuring.

Is that a function of retraining existing employees or is that more of a function of you need to continue hiring and it's a productivity issue of just the fact that you're adding new headcount?.

This is Jeff. Thanks for the question. It's both. Certainly, we're retraining and rescaling existing salespeople who we want to see stay with us, but it's also training the people that we have been onboarding on.

So for the first time, everybody who is on commission has gone through sales training, everyone has gone through a certification program to verify that they are now qualified. And in fact, we're not stopping there. We'll be running a mastery class in November to raise the bar on everyone..

Got it. And then good progress with the Marketo announcement, definitely becoming important especially as you roll out these new products.

Is that becoming more of a priority in terms of channel partnerships? I guess should we expect to see some more Marketo-like announcements in the near-term?.

Yes. When we talked about the use of channel in the past, we haven't really been any more explicit, and I think a lot of people just assumed it was launching a reseller model, which we're still serious about. Again, this is a key component of the overall channel strategy, which is going after the OEM business.

And just as we've been very, very encouraged and excited about the interest from the Marketo team, so we are seeing that opportunity with other companies..

Got it. And then just a last question for me. You guys kind of indicated that there's a transition of expenses that were supposed to be earmarked for Q3 into Q4. Is that primarily just consulting related, product related, or perhaps marketing related just curious, where you guys are spending those dollars in terms of your product development efforts..

Yes, this is Rob. It's really focused on the research and product side of things, and there's some consulting dollars in there in order to focus that research..

Got it. Thanks for taking my questions..

Thanks, Lee..

[Operator Instructions] Our next question today is coming from Steven Frankel from Dougherty. Your line is alive..

Good afternoon. Jeff, let's talk about the recurring dollar retention rate, which was disappointing again this quarter. I know you've built a portion of the sales force that's focused on that, but we went backwards this quarter.

How long do you think it takes you to turn this around, and what if anything was you might call out this quarter that that made it especially difficult?.

Yes. This is Rob. Thanks for the question and it's a good one. I think when you think about what we're seeing on the sales force and the weakness in that recurring dollar retention rate, as I mentioned in the script, it's really on that upsell at time of renewal, and that's where we're seeing the weakness and what's causing the issue in that number.

And as Jeff mentioned, we've gone through a lot of change on the sales force. We're adding great talent, but over the period we have to train that talent. We're continuing to train them, and we expect to see that start to turn around in the first part of next year..

Just to add a little bit to that, we're pleased with the improvement in Net Promoter Scores, we’ve had a nice uptick in that. The primary driver of that is the quality and the reliability. We committed to our customers 18 months ago that we were going to focus on that because that was the number one dissatisfier. We've addressed that.

We're hitting all-time high reliability in performance numbers and our customers have noticed and they're telling us these are the right things to work on. So, while we're frustrated with the tactical detail kind of account level, we know that we're moving the needle on the things that really matter.

The other key component is moving more and more to products that are application centric rather than just tool centric, those by nature are more sticky and drive greater value for customers. And that's why we're so thrilled that we got our first ever OTT product announced in the third quarter in the form of Brightcove Beacon..

Okay.

And given the Q4 is the biggest renewal period of the year, should we be concerned that this issue continuing in Q4 creates some kind of headwind as you go into 2020?.

Yes. Steve, we're not talking about 2020 yet. We still have a lot to do between now and the end of the year, and currently there's no change to our long-term expectations..

Okay.

And on this notion of some expenses being pushed into Q4 and some incremental expenses around the next new product area, could you maybe size that, kind of how many millions of dollars were pushed and how many millions of dollars of incremental investment are coming in Q4?.

Yes, sure. In total, it's about $1.6 million between the two..

Okay.

And this new product area, assuming you decide to do it, that's something that you might have a product for in late 2020 or 2021, what's the timetable? What are you thinking about for that to have a payoff?.

I don't want to get specific on dates, but 2021 is a million light years away. We don't think in those terms..

But that's good to hear.

How much more room is there for ARPU growth and does that come from these apps? Does that come from customers growing usage? How should we think about that?.

Yes, I think you're going to continue to see ARPU inch up a little bit as it's done kind of historically for the last couple of years, and that's going to come from a combination of areas. One is the continued growth in usage that our customers will have and then some of these new products and being able to sell these into existing customers..

Okay.

And any material change in the retention rate among the Ooyala customer base?.

Sorry, could you repeat that?.

What does the pipeline of renewals for Ooyala look like? Have you been able to maintain those customers, 100% of them or what percent of them?.

It’s Jeff. We're pleased with the retention rates. As we've said in the past, when we built our models and built our assumptions, we looked at retention rates, renewal rates, the opportunity to upsell and we are well within the model on what we’d expect and we're pleased with where we are with that..

Okay. Thank you..

Thank you..

Thank you. We’ve reached end of our question-and-answer session. I’d like to turn the floor back over to Jeff Ray for any further closing comments..

Well, thank you. Thank you all for dialing-in. A lot of momentum is getting built in the business. We are very excited about now starting to ship new products, there are more coming. They're very consistent with our growth strategy as we shared with you a year ago at this time on targeting the key growth segments within video.

We're starting to see as we reveal that and we're very, very encouraged about it. For us, it's all about doing everything we can to have a very strong fourth quarter and carry that momentum into the new year. Thank you all and I look forward to talking to you shortly..

Thank you. That does conclude today's teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today..