Greetings and welcome to the Brightcove Fourth Quarter and Fiscal Year 2019 Earnings Call. At this time, all participants are in a listen-only mode. The question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded.

I will now turn the conference over to your host, Brian Denyeau of ICR. .

Good afternoon, welcome to Brightcove's Fourth Quarter 2019 Earnings Call. Today, we'll 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 that 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 first quarter of 2020 and the full year 2020, expected profitability and positive free cash flow, our position to execute on our go to market and grow 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 because we expect, we anticipate upcoming or similar indications of future expectations.

These statements reflect our views only as of today and should not be reflecting 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 discussion of the material risk and other important factors that affect our actual results. Please refer to those contained in most recently filed annual report on Form 10-K, and as updated by other SEC filings. Also during the course of today's call, we 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 on our website at www.brightcove.com. In terms of the agenda for today's call, Jeff will provide a summary of financial results an update on operations and our review of our strategy.

Rob will finish with additional details regarding our fourth quarter results, as well as our outlook for the first quarter and full year 2020. 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 fourth quarter and full year results. The fourth quarter marked an important milestone with the release of Brightcove Beacon.

The first of our purpose-built applications designed to enhance the user experience and deliver greater business value for customers in our target markets. Brightcove Beacon and the rollout of other new products in our portfolio aligned to the strategic plan we have been working on since I joined the company.

I am proud of the Brightcove team for delivering on these initiatives. And we enter 2020 focused on our go to market execution to drive faster and more profitable growth. Let's start by briefly reviewing our financial results for the quarter.

We delivered fourth quarter revenue of $47.6 million, up 16% year-over-year and adjusted EBITDA was $3.5 million, which is up from $1.4 million in the fourth quarter of 2018. While our financial results were in line with our guidance expectations in fourth quarter, we experienced the challenging sales quarter.

As we discussed on our last earnings call, we decided to invest in an aggressive reorganization of our go to market team in the second half of the year. We executed on the reorganization as quickly as we could in order to enter 2020 with a fully trained and product certified team. These staff changes impacted our fourth quarter sales performance.

We've successfully completed all of the changes, and now enter 2020 with our go to market organization, fully aligned to our strategic plan. The challenging sales performance in the second half of 2019 will impact our revenue growth outlook for 2020.

Rob will walk you through the details later on in this call, but we are targeting 4% to 6% revenue growth for the year. We recognize the near term impact these actions had on our growth. But we believe they were necessary to improve Brightcove's overall operating and financial performance and will deliver the best long term results.

In 2020, we expect to deliver double digit reported backlog growth. Let me explain what gives us confidence that we can drive improved sales growth this year. First, we enter this year with the best product portfolio in our history.

We have made meaningful investments in recent years to strengthen our core platform, which we believe is the most performance in the market, and delivers five nines of reliability for our players.

This strong foundation has enabled us to invest in applications for specific use cases that are designed with the business user in mind to drive fast adoption in quick time to value.

Video is at the early stages of being democratized throughout the enterprise, which we think presents an exciting opportunity for Brightcove to become the standard for enterprise video applications. Brightcove Beacon, our new SaaS OTT platforms that we launched at the end of October was the first of these new applications.

Demand for OTT applications are growing rapidly. But they have historically been custom-built with Brittle code that requires extensive time-consuming professional services engagements.

Brightcove Beacon changes the game by leveraging our extensive OTT experience to enable companies to quickly and cost effectively deliver premium video experiences across any device.

For example, as our customers use cases and business models evolve, they can adapt their monetization models from AVOD to SVoD through simple changes to their configuration settings that automatically update across all devices.

We've hit the ground running with Brightcove Beacon, which has already generated number of sales in the fourth quarter, and it's positioned to be one of the most successful product launches in our history.

Brightcove Beacon early success is an exciting proof point that customers are looking for easy to use, yet powerful solutions that allow any content provider to deliver a world class OTT experience to their viewers. One of these early adopters is Tele-Quebec, a Canadian French language public educational television network.

They will use Brightcove Beacon to help launch their new direct to consumer OTT offerings. Brightcove was selected because of our reliability, and leadership position in the market, as well as our ability to reach the target audiences on a broad range of devices.

In addition to Brightcove Beacon, we also introduce Brightcove campaigns earlier this quarter. Our new purpose built applications focused on demand generation marketing.

Brightcove campaign enables marketers to easily create video driven marketing campaigns that yield insightful data with the ability to compare video performance against a variety of industry benchmarks.

Marketers can now generate, maintain and optimize campaigns and boost overall marketing efficiency, all from one app built to seamlessly fit into their daily workflows, and existing business tools.

Brightcove campaign is our first product built from the ground up with design thinking principles, meaning that our user experience team went on site to our customer locations to understand how they work, and then designed a product with their specific needs in mind. The result is a product unlike any product we have ever built.

Brightcove campaign is a great example of how customer success and enablement is at the center of everything we do. Both demand phase and Airstream are examples of early adopters of this product.

These new customers cited Brightcove campaigns ease of use, out of the box integration with critical marketing technologies such as HubSpot, and the analytics capabilities to quickly see how their video content is performing and understand who is engaging with it.

Overall, early feedback on the Brightcove campaign product has been very positive, and we're optimistic it will drive additional growth as we move through 2020. Our commitment to innovation continues with the impending release of our third purpose-built application in the coming months.

We will continue to push the pace of innovation in 2020 and beyond with additional capabilities that create value for our customers. The second thing contributing to sales growth in 2020 is that our sales organization build out is now complete, and we have substantially upgraded our capabilities.

We've implemented a new sales leadership team under our chief revenue officer Rick Hansen over the past six to nine months. We've attracted many new sales reps to the company in that time frame, who have at least a decade of enterprise software selling experience.

We've invested heavily in sales, training and certifications that leverages the strong foundation these reps bring to Brightcove with a deep understanding of the business value of our new products.

We've also instituted a strategic account team that will focus on driving more comprehensive customer engagements compared to our traditional approach of selling department by department. We're seeing video use cases rapidly expand within enterprises. But to date, most are not looking at their video deployments company wide.

We believe Brightcove is in a unique position to be the partner of choice for enterprises video needs, and this will be a key focus for our sales organization in 2020. We are confident that sales approach will drive more strategic, multiproduct, multiyear transactions that increases the number of Brightcove users within the enterprise.

Our new application portfolio also gives us an exciting opportunity to build out a true channel strategy for the first time. Last quarter, we talked about how we joined Marketo's launch points program. And recently, we were excited to make Brightcove solutions available on the AWS marketplace.

At this time, it is also important that we make meaningful progress on profitability. We believe there's a significant opportunity to drive productivity gains across all parts of the organization and increase the return we generate on our existing spend.

We have the ability to continue investing in exciting new product innovation and accelerate revenue growth at current spending levels. We're at the scale and maturity, where we can generate consistent, profitable growth. I would now like to highlight some great wins from the fourth quarter that reflect our positive momentum in the market.

DocuSign, the world's leading e-signature solution company, needed a video provider that could scale with this rapidly growing business and flawlessly distribute video internally and externally and Brightcove was the obvious choice. Additionally, the company needed a trusted and reliable partner to live stream its global DocuSign momentum events.

DocuSign look to Brightcove replacing its old provider because of our reliability and scalability. Mob Kitchen is a new and fast growing UK based cookery brand that originally started on Instagram for students looking for low cost and healthy recipes.

They chose Brightcove for our highly reliable and customizable player that would improve the viewing experience on their new websites. Brightcove analytics will also help them judge the success of their content. Format is a subsidiary set up by AirAsia to diversify its revenue streams.

After it launches, Format will be a new online destination for travel, food and cultural content across the ASEAN region. Video is a key part of their strategy and Format needed a partner who is reliable and has expertise in monetization and engaging user experiences.

Additionally, Brightcove's local support and extensive API's played a role in their choice. Rakuten Incorporated is a Japanese electronic commerce and online retail company that uses video across its properties including the largest online shopping platform in Japan.

Rakuten has been a long standing customer of Brightcove as we enabled the company to stream and manage a large number of videos across its websites. With this recent renewal, they have increased their financial commitment with Brightcove for another three years with Brightcove to further expand the use of videos across their digital properties.

To wrap up, 2019 was an important year for Brightcove, we stabilized the business, developed exciting new applications and revamped our go-to-market team. We have now substantially completed the work needed to position the company for success.

2020 is the year that we will bring this hard work together and start to drive faster growth and improved profitability. I have never felt more confident about our opportunity for success. I look forward to updating you on our progress throughout the year. 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 fourth quarter. And then I will finish with our outlook for the first quarter and the full year 2020.

Total revenue in the fourth quarter was $47.6 million, which was within our guidance range, breaking revenue down further subscription and support revenues $44.6 million and professional services revenue was $3 million.

12-month backlog, which we define as the aggregate amount of committed subscription related to future performance obligations in the next 12 months, was $100.6 million. This represents an 11% year-over-year increase overall, 2% organically.

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 52% of our revenue in North America during the quarter and 48% internationally.

Breaking down international revenue a little more, Europe generated 19% of our revenue and Japan and Asia Pacific generated 29% of revenue during the quarter. Let me now turn to the supplemental metrics we share on a quarterly basis. Our recruiting dollar retention rate in the fourth quarter was 89%, which is below our target range of low to mid 90s.

The largest driver of the lower retention rate was lower upsells at the time of renewal. Reflecting in part, some of the sales changes Jeff referenced earlier. Our customer count at the end of the fourth quarter was 3,595 of which 2,338 were classified as premium customers. Looking at our ARPU, within our premium customer base.

Our annualized revenue per premium customer was $83,400, which was up 11% year-over-year, and excludes our entry level pricing for starter customers, which averaged $4,600 in annualized revenue. Looking at a result on a GAAP basis, our gross profit was $28.8 million, operating loss was $6.9 million and loss per share was $0.17 for the quarter.

Turning to our non-GAAP results, our non-GAAP gross profit in the fourth quarter was $29.7 million compared to $24.8 million in the year ago period and represented a gross margin of 62%.

Subscription and support revenue represented approximately 94% of total revenue and generated a 64% gross margin in the quarter compared to a 65% gross margin in the fourth quarter of 2018. Non-GAAP income from operations was $2.2 million in the fourth quarter, compared to non-GAAP income from operations of $237,000 in the fourth quarter of 2018.

Adjusted EBITDA was $3.5 million in the fourth quarter, compared to $1.4 million in the year ago period, and within our guidance range for the quarter. Non-GAAP net income per share was $0.06 based on 39.7 million weighted average shares outstanding. This compares to breakeven on 37.4 million weighted average shares outstanding in the year ago period.

Looking at our full year 2019 results, total revenue was $184.5 million, up 12% year-over-year. On a GAAP basis, gross profit was $109 million, operating loss was $21.1 million and loss per share was $0.58, based on $38 million weighted average shares outstanding. On a non-GAAP basis, gross profit was $111.6 million.

Income from operations was $3.6 million adjusted EBITDA was $8.8 million in net income per share was $0.07 based on 39.1 million weighted average shares outstanding. Turning to the balance sheet and cash flow. We ended the quarter with cash and cash equivalents of $22.8 million.

During the fourth quarter we generated $2.1 million in cash flow from operations and free cash outflows $336,000.After taking into account $2.4 million in capital expense interest in capitalized internal use software. I'd now like to finish by providing our guidance for the first quarter and full year 2020.

I would like to start with our outlook for the full year. As Jeff mentioned, the proactive changes we made to our sales organization in the second half of 2019 will weigh on our revenue growth in 2020.

Given our ratable revenue recognition model, investors will first see the positive impact of the changes we have made to the business in our reported backlog metric. As Jeff mentioned, we are targeting double digit reported backlog growth in 2020, which will position us to drive faster revenue growth in 2021 and beyond.

For the full year 2020, we are targeting revenue of $192 million to $196 million. This includes approximately $11 million of professional services revenue. We are anticipating approximately $1.6 million of overage revenue per quarter, or $6.4 million a year. This compares to $7.4 million in 2019.

In terms of profitability, we expect non-GAAP operating income of $8.7 million to $12.7 million and adjusted EBITDA of $14 million to $18 million. In addition, we expect non-GAAP net income per share of $0.19 to $0.29, based on 40.2 million weighted average shares outstanding.

At the midpoint our adjusted EBITDA guidance reflects 350 basis points of margin expansion. For cash flow, we expect full year free cash flow in a range of $3 million to $5 million. Turning to the first quarter, we are targeting revenue of $46.8 million to $47.8 million, including approximately $2.6 million of professional services revenue.

From a profitability perspective, we expect non-GAAP operating income of $1.3 million to $2.3 million and adjusted EBITDA of $2.8 million to $3.8 million. Non-GAAP net income per share is expected to be in the range of $0.03 to $0.05 based on 39.7 million weighted average shares outstanding.

To wrap up we continue to make progress executing on our strategic initiatives. We enter 2020 with the strongest product portfolio in our history. We have the products and go-to-market team in place that can begin driving better bookings performance this year, and set the stage for faster revenue growth in 2021 and beyond.

At the same time, we are committed to delivering meaningful improvements in adjusted EBITDA margin as we focus on delivering consistent profitable growth. With that we will now take your questions. Operator, we are ready to begin Q&A..

[Operator Instructions] The first question comes from the line of Lee Krowl of B. Riley FBR..

Just want to start out first on customer retention, in turn, looks like you kind of had kind of a year-end roll off of customers, maybe just talk about the dynamics there.

Maybe, the mix between just an outright loss and perhaps maybe some executional issues as you reorganize, and then maybe just kind of reiterate kind of the steps you guys are taking to improve overall retention?.

This is Rob. Thanks for the question. In terms of the retention rate, I talked about it in the script a little bit. The real issue with that retention rate was the upsells at the time of renewal, and it was kind of a sales execution issue related to the changes that we're making on the sales team.

Going forward we expect that to for the year end up in that low to mid 90s range, as we've got the execution model in place for the sales team that we're looking to get..

Got it.

And then, as we lap the comparisons around this first just perhaps housekeeping item revenue on Ooyala in the quarter? And then also just can you remind us, as we laughed the earlier comparison of Ooyala, or most of those customers, then work through a contract cycle or do you kind of face your renewal while as we execute Q1?.

Yes, so for the quarter, we're just about $6 million for Ooyala and then in terms of where we are, we're mostly through the lap. So they're just factored into our revenue guidance for the year at this point. Most of the customers are either on Brightcove paper at this point or will be on within Q1. .

Got it. And then just last question from me. Just curious on your thoughts around these newer products. Do they tend to have a 12 month renewal cycle or, you kind of highlighted that Rakuten is shifting onto a three year contract.

Is that something new? Are you planning on extending the duration of contracts beyond one year and maybe just talk about the monetization elements to that as you think about ARPU?.

Yeah, as we think about it, there's a couple of aspects there. One is the products do tend to be a little bit stickier. So, we're expecting the retention rate for those customers to be higher going forward, as we move towards those real value add products. And the second piece of that is really from a sales execution standpoint.

They put real emphasis on going in and starting that conversation with a multiyear deal. And then always working back down to a one year deal if that's what we need to get through to win the customer. So it's a combination of stickier products and kind of the sales execution of going in leading with that multiyear deal to start..

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

[Operator Instructions] Our next question comes from the line of Steven Frankel of Dougherty & Company. Please proceed with your questions. .

Good afternoon. I'd like to go back a little bit on the last question. And in terms of the churn, I understand the lack of upsells that drove the retention rate but in terms of the number of premium customers you added, it looked like there was a decent sequential drop.

Maybe you could characterize for us the kind of customers you're losing, size of customers you're losing or any other insights into that part of the equation?.

Yeah, thanks, Steve. In terms of the size of the customers that we're losing, there's nothing unusual happening with those customers. You can see from our ARPU that we were roughly flat with last quarter. So we're maintaining that $83,000 to $84,000 ARPU for the customers.

And we really don't focus on the customer account as much as we focus on the overall bookings and driving revenue through the customers..

Again that churn, was it mostly in the legacy base as opposed to the Ooyala base you've done a decent job of retaining those Ooyala customers? And then a follow up to that?.

Yeah, no in terms of Ooyala customers we're where we need to be in terms of plan. .

And I know one of the things you talked about last couple quarters was you were going to get those Ooyala customers on to the Brightcove platform, which was going to dry margin expansion in subscription and support. And that didn't happen in Q4. Is that a function of not getting everybody cut over or there's something else going on..

Now, that's really a question of not getting everyone cut over just yet. We expect the majority of the customers via fully on the Brightcove platform by the end of Q1..

Steve, it's Jeff Ray. We're tracking to plan on migrating those customers. In fact, we were a little bit ahead of the initial plan when we put the business model together. And the customers that have migrated come back and told us it was a good experience. They liked being in a more stable environment.

We've also committed to a lot of enhancements to our core product to support features and functions that they had before. And I'm pleased with the work that the engineering team has delivered to satisfy those needs..

Okay, and Jeff you keep using this term acceleration use it probably a half dozen times in the script. But we're not seeing it in the numbers.

And I know, you committed to a double digit backlog growth but maybe to give us some insight into how patient do we need to be? Is some of that backlog growth going to drive relative acceleration as we get through this year? Or should we be thinking in 2020 is just a transition year it's another tough slog until these new contracts start to kick in.

.

It's fair. And believe me, we spent a lot of time on it. And it was a hot topic with the Board last week. As we step back and kind of look at everything. Everything that can be touched and impacted has been done and we step back and looked and asked ourselves, have we missed anything and we haven't.

The organizational structure, bringing in the right leadership team, putting engineering product management CloudOps and DevOps, all into one team, putting marketing into one global team, sales into one global team, new demand gen models, new sales models, training, enablement certification, launch of new products to acquisitions, successfully done, the build out and completion of our first offshore site in Guadalajara.

We feel good about that. We are not satisfied with the results. We also look at the fact that everything that we can touch we are touching. The other thing that we did was we took the opportunity as we were putting the planning together for this year, back in the fall of '19 to reassess our market segmentation work and our go-to-market strategy.

And the good news was one year on everything that we thought was going to deliver better results, indeed is are still the right markets and the right segments for us to be. The thing that hurt us was the sales transformation. But again, we consciously said, let's complete this, let's do it right.

Let's not do it in a half hearted way we believe in the product strategy. We're excited about the products we're bringing to market. We know that we've identified the right segments, let's get this done, let's rip off the band aid, complete the work and go into the New Year ready to grow.

And believe me, we all are working very hard to grow well beyond the expectations that we set with you in the investor community. .

And you last quarter announced this incremental investment do you think about another go-to-market module or prebuilt.

Are you going forward with that?.

Yes, we are, we were pleased with the outcome of the research and the validation. Again, we spent time with the Board going through that the Board gave it two thumbs up, which is good, because we believe in that also. I don't see that as having a material impact on 2020. But it's a strategy that will drive much higher stickiness.

Because it's not just a focus on the OVP. It's a focus on things that will deliver pretty profound ROI to the business, number one. Number two, it will open up new markets and new expansion opportunities. And it's definitely something that we can go back into and sell into the base.

It's strategic we won't get it done overnight, but it's the right thing to do. And there's enough evidence and facts to support that. .

Jeff, where are you on the VAR channel? Is that something that contributes to revenue in 2020, or is that's another item that's gotten pushed out a little further?.

We found as we did the work on that and you said specifically the value add reseller market, we needed to have products that fit what VARs can sell. And so Beacon is something that a relatively sophisticated VAR can sell and so now we have something to give us an opportunity to engage with resellers.

Launching Campaign, Campaign is definitely a product that resellers can sell. And in fact, you know, we're encouraged by the relationship with AWS and the opportunity to be on their marketplace, because it definitely is something that the community of AWS marketplace, consumers can take advantage of.

So we wanted to make sure that we just didn't go out and recruit resellers and not have products that deliver really immediate sustainable transactions for them..

And Rob a couple questions for you.

What kind of op expense growth rate is baked into this forecast? Is a low single digit growth rate in OpEx?.

Yeah year-over-year the guidance is basically flat on OpEx..

Okay, and then I missed the 12 month backlog number.

Could you give that to me again?.

For the end of this year?.

Yes. .

$100.6 million on the 12 month backlog for subscription. .

100.6. All right, thank you..

We have reached the end with a question and answer session. I will now turn the call back over to Jeff Ray for any closing remarks. .

All right, thank you, operator and thank you everyone for joining in. It was a tough, challenging finish to the year. But again, we've consciously made the right decisions to position ourselves for breakout profitable growth. And believe me, this is our number one focus for this year. We feel good about the decisions we've made.

And we know we've got to deliver that and the results. Thanks, everyone. And have a good evening. Bye..

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. And have a great day..