Brightcove Management Discusses Q1 2013 Results - Earnings Call Transcript

Apr.30.13 | About: Brightcove (BCOV)

Brightcove (NASDAQ:BCOV)

Q1 2013 Earnings Call

April 30, 2013 5:00 pm ET

Executives

Brian Denyeau

David R. Mendels - Chief Executive Officer, President, Chief Operating Officer and Director

Christopher Menard - Chief Financial Officer and Executive Vice President

Analysts

Tom M. Roderick - Stifel, Nicolaus & Co., Inc., Research Division

Terrell Frederick Tillman - Raymond James & Associates, Inc., Research Division

Jonathan Parker - Morgan Stanley, Research Division

Sameet Sinha - B. Riley Caris, Research Division

Brendan Barnicle - Pacific Crest Securities, Inc., Research Division

Robert P. Breza - RBC Capital Markets, LLC, Research Division

Steven B. Frankel - Dougherty & Company LLC, Research Division

Operator

Greetings, and welcome to the Brightcove First Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Brian Denyeau of ICR. Thank you. Mr. Denyeau, you may begin.

Brian Denyeau

Good afternoon, and welcome to Brightcove's First Quarter 2013 Earnings Call. Today, we'll be discussing the results announced in our press release issued after the market closed today. With me on the call today are David Mendels, President and Chief Executive Officer; and Chris Menard, 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 second fiscal quarter of 2013 and the full year of 2013; our position to execute on our growth strategy; our ability to expand our leadership position; and our ability to maintain existing and 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 varieties 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 subsequent files of quarterly reports on Form 10-Q and our other SEC filings.

Also during the course of today's call, we'll 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 the market closed today, which you can look at in our website at www.brightcove.com.

In terms of the agenda for today's call, David will provide a summary review of our financial results, market opportunity, as well as an update on our go-to-market strategies and product innovation. Chris will then finish with additional details regarding our first quarter 2013 results as well as our guidance for the second quarter and full year 2013.

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

David R. Mendels

Thanks, Brian. And thanks to all of you for joining us today on our First Quarter 2013 Earnings Call.

We're pleased to report first quarter results that were ahead of our expectations in both the revenue and profitability perspective. Our first quarter results were highlighted by revenue of $24.7 million, which represents growth of 24% on a year-over-year basis.

In the 9 years since Brightcove was founded and introduced the first online video platform market, we have seen dramatic change in the manner in which consumers consume digital media content. In that time, we've moved from digital content being consumed on a PC to the heterogenous environment we see today of smartphones, tablets, IPTVs and gaming consoles running operating systems like iOS, Android and Windows 8. This fragmentation almost generally continues to increase in the years ahead. This is great news for Brightcove.

The emergence of these new technologies provides a powerful tailwind for the online video platform market and Brightcove in particular. The costing complexity for our customer to manage and optimize the performance of their digital content across this changing landscape has quickly proven to be an -- extremely expensive and time-consuming.

At the same time, the proliferation of ways to deliver compelling digital content to consumers has opened up new avenues for brands and content creators to reach their audience while also creating new ways to monetize their content. We believe we are only at the very early stages of both brands and digital content creators leveraging these new distribution channels and platforms.

Our focus at Brightcove is to be the leading cloud-based supplier of world-class software that enables customers to take full advantage of the opportunities these new delivery channels provide.

As we have talked about previously, the media vertical is a key focus for Brightcove and we have strengthened our sales coverage of this strategic vertical with a indicated media sales each of our major regions. We are beginning to see this focus pay off with great media customer wins, including Network Ten, which is the third-largest broadcaster in Australia and a major player in Australian sports broadcasting. Network Ten will be using Video Cloud for their catch-up TV service and will also be using our Zencoder technology as a key part of their transcoding workflow.

Another media example comes from one of our larger existing customers, Weather Channel Interactive, who signed a new multiyear agreement with a meaningful upsell component. We believe these are terrific validations of the value media companies will -- media organizations can generate by utilizing Video Cloud, particularly when there are tremendous levels of scale and technical specifications that are required.

Another example of a new use case in the media market was our recent announcement regarding Rovio Entertainment, the Finnish media entertainment company which is the creator of the highly successful Angry Birds franchise. Rovio chose Video Cloud to support the launch of its brand-new Angry Birds Toons animated series. With this series, Rovio is essentially creating a new content distribution network to directly engage its consumer base through the Angry Birds app, which will supplement existing distribution channels like on demand, local and IPTVs. This is really an exciting example of the new paradigm being created by the explosion of smart devices and improved broadband connectivity and an early indication of how the lines between content creators and content distributor may become harder to distinguish in the coming years.

We are also very pleased with the success that we are experiencing with our Zencoder offering. The first quarter was another strong performance in this area of our business, including deals with many great customers, including AOL, Shutterfly, the Wall Street Journal and Bassmater.

The AOL On Network, according to comScore, has grown to be the second largest video web property, behind only YouTube, and was the fastest growing in the top 10. AOL will be using Brightcove's Zencoder cloud transcoding service to provide high-volume and high-performance encoding of all their videos into all of their formats and bitrates needed to reach consumers across many devices.

Bassmaster, a fishing membership with more than 500,000 members that runs 34 bass fishing tournaments annually, is using Zencoder's recently released Live Cloud Transcoding solution to enable fans to watch weigh-ins live online. The ability -- the inability of Bassmaster's existing encoding hardware to stream to iOS devices was a major pain point that Zencoder was able to solve at a fraction of the cost.

Encoding continues to be one of the most significant pain points for customers looking to manage large amounts of digital content, and Zencoder's best-in-class cloud-based technology is a compelling, cost-efficient alternative to the traditional solution for encoding, which is continually increasing the amount of on-premise hardware.

These are great examples of the success we are having offering our services of the Zencoder on an a la carte basis as a discrete functional utility.

During the first quarter, we also had good sales activity with our flagship Video Cloud solution at both new and existing customers across numerous industries, including consumer goods and higher education. Some of the new Video Cloud customers that we signed during the first quarter, as well as significant accounts that we were able to upsell, included Ford Direct, EMC, Wesleyan University, the Metropolitan Museum of Art, the Chicago Symphony Orchestra and Smartcom:tv, among others.

Smartcom:tv is an interesting example. They're a leading producer of web videos and live streaming content for corporate clients in Scandinavia. Smartcom is utilizing Video Cloud as part of an innovative reseller agreement. Through this reseller agreement, Smartcom is marrying their production capabilities with our market-leading distribution capability to create a one-shop -- one-stop shop for customers. We have seen a good deal activity through this arrangement so far, including multiple customer wins during the first quarter.

From an operational perspective, we remain focused on increasing the productivity of our sales organization, and we are optimistic that our efforts will yield improving results as we move further into 2013. We also made good early progress on the initiative we discussed last quarter to improve the on-boarding experience to provide best practices to our customers in the premium market to ensure they have a successful experience with Video Cloud.

On the product front, we have several exciting announcements that we believe will help drive increased consumption of digital content for almost any organization. Towards the end of the quarter, we announced the general availability of the Zencoder Live Transcoding service, which will enable customers to encode live video in real time while producing adaptive bitrate streams, all without having to invest in on-premise and inefficient hardware. The earlier response we have seen from customers have been very favorable and will help us further build on the success and market momentum we have realized since acquiring Zencoder last summer.

We also unveiled our updated strategy to help customers build world-class video apps with the introduction of native player SDKs for iOS and Android that seamlessly integrate with industry-leading advertising, analytics, audience measurement and digital rights management provider. This native app approach is a direct result of the feedback we gained from customers and prospects over the past 18 months with our hybrid App Cloud product, and we adapted quickly to ensure we are properly addressing this dynamic and rapidly evolving market.

Lastly, we introduced a comprehensive monetization solution for HTML5 video that enables pre-, mid- and post-roll ads, new APIs that allow customers to dynamically alter their ad policies and provides plug-in support to leading ad servers such as FreeWheel, Google, Videoplaza and YuMe. This has been an -- there has been an explosion of longer-form, ad-supported and rights-managed content being consumed on mobile devices in the past 2 years, and this new solution will enhance our customers' ability to monetize their content in that new consumption paradigm.

We are working on an aggressive product roadmap to significantly enhance the functionality of Video Cloud, including integrating some of the exciting technology we have from Zencoder into our core platform. We will be highlighting some of these advancements at our third annual PLAY user conference in Boston in a couple of weeks. We will also be hosting a Financial Analyst Day for the investor community on May 14, and I hope many of you will be able to join us.

To summarize. Our first quarter results were above our guidance, and we're making good progress on positioning Brightcove to capitalize on the significant market opportunity we see with the secular shift of digital content being delivered by the cloud. We believe the investments we have and are making in our expanded product offerings position Brightcove as the strategic vendor of choice in what we believe is a multibillion-dollar market opportunity.

With that, let me turn the call over to Chris to walk you through the numbers.

Christopher Menard

Thanks, David.

As David mentioned, our first quarter revenue and operating results exceeded our guidance on both the top and bottom line. For the first quarter, total revenue was $24.7 million, a 24% increase from $19.9 million in the first quarter of 2012 and ahead of our guidance of $23.5 million to $24 million.

Subscription and support revenue of $23.8 million was up 26% year-over-year, while professional services and other revenue was $900,000 (sic) [$944,000], a couple hundred thousand dollars less than the first quarter of 2012.

Turning to revenue mix. Our premium offerings generated $22.2 million of total revenue, representing a 22% year-over-year increase, while our volume offerings generated $2.5 million in revenue, a 45% increase from the first quarter of 2012. On a geographic basis, we generated $15.4 million of revenue in North America for the quarter, which was up 18% year-over-year and represent 62% of our total revenue. Europe recorded $5.4 million, a 22% increase and 22% of total revenue, while Japan and Asia Pac generated $3.9 million of revenue for the quarter, up 57% year-over-year and representing 16% of total revenue.

From a vertical perspective, non-media customers represent 63% of our first quarter revenue and grew 31% on a year-over-year basis, while our media customers represent 37% of our revenue and grew 13% on a year-over-year basis. We continue to believe we have a truly horizontal market opportunity and expect our industry mix will become increasingly diverse over time, but we would expect the media to be always be our largest market.

Our year-to-date average monthly video streams as of March 31 were 853 million, which was up from 699 million at the end of the fourth quarter and represented 24% growth on a year-over-year basis.

Please note that we have now fully anniversarized the impact of AOL, so our streams growth is now on an unadjusted basis. As a reminder, video streams have not historically been a good predictor of revenue, and we do not expect them to be in the future.

Our recurring dollar retention rate was 97% for the quarter, which was a strong rebound from last quarter and toward the higher end of our historical range. We had a strong quarter of selling into our installed base, which we believe is a positive indicator of the value customers are generating with our solutions.

We are pleased with our dollar retention rate in the first quarter, but we would remind you there can be some quarter-to-quarter variability. Our target for recurring dollar retention rate continues to be greater than 90%.

Looking at our customer count, we ended the first quarter with 6,321 customers compared to 4,254 at the end of the first quarter of 2012. Breaking this down further, we ended the quarter with 1,690 premium customers, an increase of 65 from the end of the fourth quarter. We had 4,631 volume customers at the end of the quarter, which was down 111 sequentially due primarily to our decision to discontinue our $5 per video offering in January.

As we discussed in the past, from time to time, we will introduce new pricing and packaging offerings in order to test strategies for the lower end of the market. In this case, we learned that customers acquired, via our $5 per video entry-level offering, were more likely to churn when compared to our volume customers at traditional price points. As a result, the returns on that customer acquisition program did not warrant continued investment. These customers represent a small fraction of our total revenue, but we do have several hundred of these customers remaining in our volume customer count. As we experienced churn with some of these customers, we will not be replacing them with new $5 per video customers, which may skew our volume customer growth for the next few quarters.

In the first quarter, we had just over 30 volume customers upgrade into Premium, including the Guggenheim Museum, the San Francisco Opera and TV Guide Networks. We continue to view our volume business as an attractive theater channel into our premium tiers. As a reminder, premium consists of our traditional premium Video Cloud customers and Zencoder customers on annual contracts. Volume includes our Video Cloud Express customers and all month-to-month and pay-as-you-go Zencoder customers.

Moving down the P&L. Our non-GAAP gross profit in the first quarter was $16.7 million, a 22% increase from a year ago and a non-GAAP gross margin of 67%.

Subscription and support revenue represented approximately 96% of our total revenue and had a 73% gross margin, while services revenue represented approximately 4% of our total revenue and a negative 71% gross margin. We expect to realize additional gross margin expansion over time due to the inherent leverage in our subscription model.

Non-GAAP loss from operations was $1.2 million in the first quarter, an improvement compared to a loss of $2.3 million in the first quarter of 2012 and better than our guidance of a non-GAAP operating loss of $2 million to $2.3 million.

Non-GAAP net loss per share was $0.06 based on 28 million weighted average shares outstanding, which exceeded our guidance of a loss of $0.08 to $0.10 per share. This also compares to a per share loss of $0.17 on 15.8 million weighted average shares in the year-ago period.

On a GAAP basis, our gross profit was $16.3 million, operating loss was $3.9 million and our net loss per share was $0.15.

Turning to the balance sheet. We ended the quarter with cash, cash equivalents and investments of $28.6 million compared to $33 million on December 31.

From a cash flow perspective, we used $2.8 million in cash from operations and invested $126,000 in capital expenditures during the quarter, which equates to a negative free cash flow of $2.9 million for the quarter. This compares to a negative $6.5 million in the year-ago period, which was impacted by some incremental CapEx related to the move to our new headquarters.

Our free cash flow performance in the first quarter was in line with our expectations and reflect the timing of commissions and year-end 2012 bonus payments. We also spent $1.1 million to purchase the remaining 37% of our Japanese joint venture. We continue to expect to generate $1 million to $3 million of free cash flow for the full year 2013.

Finally, I'd like to provide our financial outlook for the second quarter and update you on our outlook for the full year of 2013.

For the second quarter, we are targeting revenue in the range of $25.7 million to $26.2 million, which represents growth of 19% to 21%. We anticipate professional services will contribute approximately $1.5 million of revenue in the second quarter. We are targeting a non-GAAP operating loss of $1.4 million to $1.7 million and a non-GAAP net loss per share of $0.06 to $0.07 based on 28.2 million shares outstanding.

For the full year, we are raising our revenue guidance to a range of $104 million to $106 million, a non-GAAP operating loss of $3.3 million to $4.8 million and a non-GAAP net loss per share of $0.15 to $0.22 based on 28.4 million shares outstanding.

We also continue to expect that we will generate a non-GAAP operating profit in the fourth quarter of 2013.

In summary, we exceeded our financial guidance for the first quarter and believe we remain well positioned to deliver against our full year plans as well. We are focused on building upon our leadership in the emerging OVP market and believe we are well positioned to capitalize on our multibillion-dollar market opportunity.

Operator, we are now ready to begin the Q&A session.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Tom Roderick with Stifel, Nicolaus.

Tom M. Roderick - Stifel, Nicolaus & Co., Inc., Research Division

So wanted to just talk about the high end of the business. The premium net adds, you were up a little bit versus last quarter. And maybe at a higher level, we've seen some other reports out there that the media business is coming back a little bit stronger. So Akamai, which I recognize is not a pure competitor, but saw that Akamai put up a nice quarter, with media being a driver. So can you give us a sense here, at the high end of your business, how much is being driven by media in the premium segment versus the broader demand from the broader enterprise segment and how we ought to think about your positioning in those 2 going forward?

David R. Mendels

Sure. Tom, this is David. I think that we talked over the last quarter or 2 about the fact that we're increasing our focus on the high end of media. One of the things we've done in terms of really building our go-to-market for this year and starting really in the last year was build out a dedicated vertical go-to-market team focused around the high end of media, with a dedicated team here in North America, in Europe and in Asia Pacific, and really hiring-in some people with deep domain expertise and knowledge who come directly out of the industry. So we're really excited about that. What we saw last year was our pipeline was growing very fast in the high end of media, and it was a very promising sector for us based on that. We continue to invest in that and build out that functional team, going from North America and to make it into a global team at the beginning of this year. And we continue to see very promising results. The most tangible result we announced today was winning Network Ten, which is a large broadcaster down in Australia. That was a significant transaction for us at the beginning of what I hope to be a very long-term and successful relationship, but also the growth that we saw with The Weather Channel Interactive, another major media company here in North America that we have a long-standing relationship with but that continues to grow to invest in video, to invest in mobile and web delivery. And we've been able to grow with that because of our focus. So we do see nice pipeline growth. And I think that, over time, we'll continue to see good growth in that segment with some very nice signed deals as well.

Tom M. Roderick - Stifel, Nicolaus & Co., Inc., Research Division

So David, on that point, how penetrated do you see the high end of the media market, being at this point? And what are the real competing solutions, how was it is evolving as you look at them at the market place out there?

David R. Mendels

Sure. We still think the market is early. Even large media companies who have adopted Brightcove or have adopted, perhaps, one of our competitors, we still see that penetration is low within those companies, that they have not adopted on a across-the-board universal basis. And so there's still opportunities to grow in such companies. But then again, many companies have not yet adopted us or anyone. Way -- the way many people started at the high end of the media market was what we'd call a DIY approach, a build-your-own approach, where they invested in engineering and systems. And it's really over the last year or 2 that we're seeing that flip, where people are saying, "God, this is a lot harder to build than we thought it was going to be. There is so much fragmentation in the market. We have to take into account all of these different devices, all of these different protocols, all of these different security measures. And why are we doing this? We're a media company, we're not a software company." So that's the story we're hearing from all the people. And we think that we're still in the early days of that. And if you think about it also, on a global basis, one of the great things about this industry is there are major media companies, really, in every country. So take TV New Zealand, we've talked about them in the past, they're a great customer. It's a small country, but a great broadcaster that has a forward-looking vision and has been an excellent customer of ours. So you can look around the world and see, well, there's a great newspaper or a great broadcaster in almost every country in the world. And we still think there's lots and lots of opportunity ahead.

Tom M. Roderick - Stifel, Nicolaus & Co., Inc., Research Division

That's great. Chris, just from the standpoint of guidance here. You just put up a 24% growth quarter. You're guiding to a number that's in the ballpark of 20% year-on-year for the full fiscal year, which all sounds great, but if we compare it to a year ago, it's definitely a deceleration. So I guess the issue that investors are trying to get their hands around is, what is a sustainable level of growth? And if we look at backlog and sort of back into what bookings were last year, maybe you'd get to a sort of low to mid 20s. Is that a sustainable level of growth? Or even just a 20% barrier. What do you have to do to maintain that level of growth as you look at into 2014 and beyond?

David R. Mendels

Yes, thanks, good question. I think, as you look out past 2013, it's just we need to continue to execute. I mean, we continue to put up great logos, more net new customers. The revenue retention rate was great in the first quarter, then we came in at 97%, above our historical average of 95%. And still, all those things are going to add to incremental revenue next year. It is a -- we did beat and raise the fourth consecutive time as a public company. So overall, I'm really happy with where we are. And it's too early to give solid or concrete guidance for 2014.

Operator

Our next question comes from the line of Terry Tillman with Raymond James.

Terrell Frederick Tillman - Raymond James & Associates, Inc., Research Division

Last 12 months, you did have a couple of really large marquee media win, big media wins. Could you maybe help us with how far through those opportunities you are? I know it's more of like a -- this may be the wrong to say it, but this is the way I'm thinking of it, a hunting license, but how far through in those opportunities are you? And then also, I think, David, you talked about the large media sales force. How do we think about the maturation of their pipeline? And could some of that productivity actually affect positive revenue this year? Or we should think about it more as a '14 event?

David R. Mendels

So I think that we have talked about some great customer wins, over the last year, in the media space. We've talked about NBC, for example. And we've given it as an example a couple of times because NBC did not make a single enterprise-wide decision on a platform. They ran an evaluation process in a centralized way, but they allowed each brand to make its own decision. And so we've won some great brands within NBC. We talked about Universal Sports. We've talked about Telemundo, we've talked about Access Hollywood. And so yes, that's a real business today, and those are all good customers. And it is also a hunting license to continue to grow. And so I think we will be able to continue to do that. So I think, it's balanced: We've won some good business, and that's really tangible today. But in many cases, there's a lot more business for us to win. I think that we will see progressive results from our vertical team. I think, for example, the Network Ten win this quarter, the focus on Weather Channel Interactive this quarter, are already results from that group of people that we're pretty excited about. And I think that's -- you'll see progressive growth over the course of this year and into the next several years. I -- again, we think this is a long-term, large opportunity. I would also add one more piece here, which is we've talked a lot about Zencoder. Zencoder is a company we acquired last year that really expands our value proposition and let's us solve additional use cases in the cloud transcoding space. It's not just around the publishing and delivery of video but also transcoding for all the purposes and for -- of archives and other stuff. That's another thing we can go back to every one of these media companies and sell, and we're seeing some good results with selling Zencoder into those accounts as well. So I think there's lots of opportunity and lots of growth ahead of us.

Terrell Frederick Tillman - Raymond James & Associates, Inc., Research Division

Well, you're actually feeding in my next question. In terms of the Zencoder product, I mean, there were a couple of good products that had come out, like Live Events. Maybe an update on that, specifically. And then the original idea was that it was about a $2 million annualized business and that you would at least double that in '13. Is that still the case?

David R. Mendels

Sure. Let me try and answer that. So first of all, the core Zencoder business, as I mentioned earlier in the call, is doing very well. We're seeing some very nice wins. I'm pretty excited about the brands that we won. We -- as you know, we've had a history on and off with AOL, but we won a significant transaction there around Zencoder where they're using us for the AOL On Network, and that content; with Shutterfly; the Wall Street Journal. And also, we see people adopting the new Zencoder Live Cloud Transcoding product. That's a brand-new product that we went into sort of what we called limited commercial availability right at the end of last year, but really, it went into general availability at the end of the first quarter. And we already have some great early customers. And so a wide range of customers. One that we mentioned earlier was Bassmaster. If you're not into fishing, it may not be high on your list, but people in the community around this are really rabid about it. And they have all of these live events around fishing weigh-ins. We're seeing a really wide variety of live events. So think we are on track and feeling very good about the core Zencoder business and what we've talked about in the past. I think we have an opportunity to grow that very nicely and adding in the live opportunity. It's very big. It's a fundamental trend where we're seeing more and more live delivery of content to the web, both live events and 24/7 live. You're going to see more investments from us in this, from a product perspective, over time. And I think it'll be an ongoing theme, I hope, in every one of these calls this year.

Christopher Menard

And then Terry, we're still on track to do $4 million of revenue this year.

Terrell Frederick Tillman - Raymond James & Associates, Inc., Research Division

Okay. And just my last question, just for my model purposes here. Chris, in terms of the previous comments, I jumped on late, missed the answered and I'm sorry, but I've talked about it. The cash flow, positive for the year, is that still a target, and even the FCF or free cash flow line?

Christopher Menard

Yes, free cash flow, between $1 million and $3 million for the year.

Operator

Our next question comes from the line of Jennifer Lowe with Morgan Stanley.

Jonathan Parker - Morgan Stanley, Research Division

Guys, it's actually Jon calling in for Jennifer Lowe. You guys did beat -- you ended the quarter by, I think, $1 million in inventory and raised the guidance for the full year a bit more than that. Can you talk a little bit about what you did see in the quarter that gives you the confidence to do that following your sort of initial outlook that, I think, was perhaps a little bit more conservative compared to investor's expectations?

Christopher Menard

Yes, when I look at the revenue overachieving in the first quarter and then what led to the raise for the remainder of the year, you really have 3 things. The first is recurring dollar retention rate jumps back up to 97%. And so we've always said we forecast down to the historical run rates, so that's been lower the 90s, somewhere between 93% and 94%, historically. We're off to a pretty good start in the quarter. So we generate some incremental revenue in bookings -- from bookings that we had within the quarter. And we also beat the professional services revenue number. We had said it would be somewhere around $700,000, $750,000, and we came in north of $900,000, so that definitely helped as well.

Jonathan Parker - Morgan Stanley, Research Division

Okay. And maybe this is following up on next one, one quick clarification. We talked about the retention rate for the quarter. I know, at the end of last quarter, you talked about a few deals that sort of slipped out of Q4 in terms of renewing that caused the renewal rates to be a little bit light last quarter. Are those -- those end up renewing in Q1, are those included in that number?

Christopher Menard

Yes, they actually had renewed by the time we did the last conference call, so they renewed in January. And we picked up a couple of incremental points within the retention rate because of those customers. But even if you strip those out, we still would have been above the historical average.

Jonathan Parker - Morgan Stanley, Research Division

Great. And then a last question for me. David, I know guys have been talking about originally adding 15% to 20% sales capacity this year. Can you talk a little bit about where we are from a hiring perspective? And then in your new seat, is there anything you're doing different from a sort of kick-off perspective this year? Or is it really the sustained motion as past years?

David R. Mendels

Sure, thanks. We are adding some great heads across the sales organization, both sort of outbound new business sales people but also we're investing in our account management team. That -- they're focused on renewals and upsells within our base. We've added some good people in our sales engineering team. We've added some people in our media vertical team. The -- we don't have an exact number, but we're on track for the year to achieve our goals in terms of adding people. So I feel good about the people we've added. It takes a little about a -- a little bit amount of time to ramp each person, and so we'll see the results, hopefully, over the course of the year. And we'll be able to give you some updates later in the year. In terms of a kickoff and what we're doing new, to be fair, I have been the Chief Operating Officer for 3 years prior, so this transition between me and Jeremy was not a big right turn. I'm still in the same seat I was. I do think we've done some great things this year in terms of kicking off. Really, a strong focus on the media vertical, in particular hiring some new people that come with deep domain expertise and experience in that vertical straight out of the broadcast verticals, which has been really helpful to us, I think. Investing this year in some new people that we talked about it in the last call that are starting to have a nice impact, I think, in terms of what I'd call customer success: people working on on-boarding of new customers, people working out what we call health checks out of existing customers. So we can go back in and really understand, if a customer is underutilizing us or mis-utilizing us, and course correcting, get them successful and maybe even grow them, rather than have them experience problems down the line. So those are some of the investments we're making this year in our go-to-market, which we're very excited about.

Operator

Our next question comes from the line of Sameet Sinha with B. Riley.

Sameet Sinha - B. Riley Caris, Research Division

A couple of questions here. David, can you talk about the average revenue per premium customers? Can you compare the new customers to the existing base and provide more color behind it? Secondly, Chris, can you talk about, what were the overages this particular quarter? And my final question would be, in terms of, if you would look throughout the year, I mean, your operating expenses came in below our expectations. What are some of the key events that could move operating expenses? I know, for example, you have your customer conference next -- this particular quarter. That smooth things out will help us model things out.

Christopher Menard

Yes, so this is Chris. I'll take the first one, which is revenue per premium customer. License revenue came in at just over $51,100 annualized. That's an increase of about 2% over the same period last year. And your second question, I think I -- go ahead.

Sameet Sinha - B. Riley Caris, Research Division

Yes, I -- well, basically, I wanted to get some color around, I mean, with these new customers, are they coming in, I mean, at a higher average revenue versus your existing base or...

Christopher Menard

Well, new customers tend to come in lower than the historical average. I think, a general new customer, it hasn't changed over the last couple of years, comes in somewhere between $20,000 and $25,000 first-time sale, and then they tend to grow over time. Remember, this is just license, no professional services within that number. And then in terms of the operating expenses, you're absolutely right, we do see a little jump in sales and marketing expense in the second quarter because of Brightcove PLAY, which is scheduled for a couple of weeks from now here in Boston. But outside of that, there's no major movements in the P&L. Occasionally, in the fourth quarter, you'll see a little extra sales and marketing expense as people get near kickers. Those commissions are expensed in the fourth quarter as those extra bonuses are achieved.

David R. Mendels

One thing I can add is, as we focus on the high end of media, in that vertical, that is a space in which we tend to see larger deals in terms of not the average new deals, but within that vertical, we tend to see more deals that might be 6 or -- 6-figure or high-6-figure or even larger deals. And so as we focus on that, we'll see more of that. And we had a good mix and feel from the first quarter as well.

Sameet Sinha - B. Riley Caris, Research Division

Okay. My final question is about overages.

Christopher Menard

Yes, I'm sorry. Yes, they were in line with what we saw last year on a quarterly basis.

Operator

Our next question comes from the line of a Brendan Barnicle with Pacific Crest Securities.

Brendan Barnicle - Pacific Crest Securities, Inc., Research Division

And this question, I think, has been asked a couple of different ways. But David, with the media business up 13% this quarter, with all these changes, it sounds like you expect that growth to accelerate. What do you think a kind of goal growth rate should be for that part of the business?

David R. Mendels

Well, I want to be careful because that's not a number we're going to guide to on a discrete vertical basis. I just would caution people to keep in mind the way subscription businesses work. It's fairly obvious, but so for example, if we win a major new customer like Network Ten in Q1, they may contribute very little revenue in the quarter if the deal gets signed, let's say, in the last few days of the quarter. So essentially, no revenue within the quarter would be recognized rapidly on a daily basis. And so I think you'll see an impact in growth as we focus on the media vertical, but that impact on the revenue line will be slower, obviously, than you might like.

Christopher Menard

Yes, Brendan, I think first thing you need to remember is we're a little bit lumpy because of services revenue. So there are quarters where we'll have most of the services revenue related to media, and somewhere, it's not so media focused. And that can be a swing in any given quarter of hundreds of thousands of dollars.

Brendan Barnicle - Pacific Crest Securities, Inc., Research Division

Great. Just following up on that services piece. Chris, did you say $1.5 million services for the next quarter? Is that -- you'd mentioned that in your comment.

Christopher Menard

I did. Yes, that's my expectation.

Brendan Barnicle - Pacific Crest Securities, Inc., Research Division

Okay, great. And then just back to the move to the native development and then a change you guys made. And you mentioned that you saw some impact from that. Can you give us a little more color on what you saw specifically in terms of interest around that move back to native?

David R. Mendels

Sure. Well, as you know, we had invested in a product line and a technology that used what we called hybrid application development models, right? So it's a mixture of HTML and native in order to deliver applications. And what we found was -- while there was many good things about the model and the product, was that the industry was still very focused on pure-native development. And there was a lot of pieces of the ecosystem that really required that. And so we did shift our focus, as we announced during the quarter, to build out more complete SDKs for native app development on iOS and on Android. And they're quite powerful and solve some interesting and hard technical problems that we saw the customers struggling with, for example, delivering high-quality streaming video to previous versions of Android that didn't support streaming out-of-the-box, solving some of the problem of having multiple videos and buffering one while the other one plays, and things like that. So we found we're able to solve some hard technical problems, and we've seen a lot of interest from customers, particularly in the media space, in -- on helping them do that. I think what we're seeing across-the-board in our customers is that mobile is becoming increasingly the large percent of their viewership. They are really working now on not just how do they get users on mobile but how do they monetize that. There've been a lot of reports in the industry that even companies that have very high percentages of mobile viewership are getting much lower revenue from that viewership. They're not getting just good advertising revenue. And so building up these native SDKs let our customers take advantage of their advertising sales and their investments in ad server technologies like FreeWheel and DoubleClick, helps our customers make more money. And so that's something that's been attractive to a bunch of our customers. So we've seen some early adopters of that technology. It's still early. We have a few people that are live now, but over the course of the year, I think we'll see more and more. It gives us another way to go into a customer and provide them with a unique and compelling value proposition. And so that's something that we're constantly looking for. As We look at the use cases in the market, it's not one model and use case. Different customers have different pain points and different problem sets. And so being able to go in and solve a very specific technical problem for them around the mobile delivery of video has been very compelling as a way for our sales people to get in the door and start to build a relationship with some customers.

Brendan Barnicle - Pacific Crest Securities, Inc., Research Division

But you've seen it already as a competitive differentiator.

David R. Mendels

Yes.

Operator

Our next question comes from the line of Rob Breza with RBC Capital Markets.

Robert P. Breza - RBC Capital Markets, LLC, Research Division

Maybe this is, Chris, if you could just talk about the $5 discontinued offer. And we see the drop of 111 customers there. I mean, how much of that was due to the $5 discontinuation? Or how should we think about it as being greater than that? And if you took up out that $5 from a year-over-year comparison, it actually go up.

Christopher Menard

Sure. So we lost more than 111 from the $5-per-video campaign. So first, let me just spend a second on why we discontinued it. As we talked about in last conference calls, we were shifting some of our marketing dollars, a couple hundred thousand dollars per quarter away from going after the volume business and putting it towards the premium business, just because the annual contract value was so much larger. Again, on the premium side, we tend to get customers up to an average of just over $50,000 of license revenue per year. In volume, we tend to be somewhere around $2,200 per customer on average. And so what we're seeing with the $5 promotion is that, in the first couple of quarters, we were generating a pretty healthy amount of net new customers, but they were definitely churning at a higher level. In fact, in the fourth quarter, we lost pretty much the exact same number that we gained. And then we were looking at the customer acquisition cost, and it was just to expensive to go after them for the $60 per year. And so we discontinued that in January. And so we were -- did pretty well in terms of all the legacy or traditional express categories outside the $5, and we did pretty well within Zencoder. But it's just an overall drag on the total volume cost per number. There are approximately 600 of those customers left, and so if they continue to churn out, I expect we could see this for another quarter or 2.

Operator

Our next question comes from the line of Steve Frankel with Dougherty & Company.

Steven B. Frankel - Dougherty & Company LLC, Research Division

I wonder if -- we talked about NBC. I wonder if you might give us some insight on what's happening at Viacom.

David R. Mendels

Well, we're still working very closely with Viacom. They're a great company, that've got great brands, we're very excited about it. But I'm not going to talk too much about their specific implementation because it's really their business to announce and to talk about, and they've asked us not to preannounce or talk about some of their digital video initiatives. We're excited about what they're doing. They're a great brand. We're working with them very closely. And we'll see a lot of great video coming out digitally from them across a range of different devices over the next year or 2. I'm very excited about that.

Steven B. Frankel - Dougherty & Company LLC, Research Division

Yes. And will you be cash flow positive in Q2?

David R. Mendels

It's going to be very close. So the $1 million to $3 million for the year. I have us just about at breakeven, but it's a pretty small number, and the margin for error in $100,000 each way. But I would say, right around cash flow breakeven, free cash flow.

Steven B. Frankel - Dougherty & Company LLC, Research Division

Okay. And DSOs ticked up in Q1. Was that just such a seasonal impact or big bookings late in the quarter, like you inferred in the media business?

Christopher Menard

Yes, it's actually -- it is up. It's about 78 days overall, but it's up in a good sense. The aging is very high quality. And deferred revenue was also up a lot as well. Deferred revenue was up about 16% compared to last quarter and about 51% compared to last year same period. And so at this point, about 51% of our total premium customers are annual advanced, so we've done a really good job of getting those guys converted up. And you're absolutely right, for new customers, I think most of those deals signed in the last 2 weeks or so of the quarter. So you end up with the spike in deferred revenue and not enough time to collect it. But it sounds like a bad metric overall, though I'm pretty happy with the balance sheet.

Operator

Gentlemen, there are no further questions at this time. I would like to hand the floor back over to you.

David R. Mendels

Thank you very much. We really appreciate your time today. We're excited about achieving some very solid results and being able to raise our guidance. And we look forward to a great quarter ahead of us as well.

Christopher Menard

Thank you.

Operator

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

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