Brightcove Inc (BCOV) Management Discusses Q2 2013 Results - Earnings Call Transcript

Jul.26.13 | About: Brightcove (BCOV)

Brightcove (NASDAQ:BCOV)

Q2 2013 Earnings Call

July 25, 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

Jonathan Parker - Morgan Stanley, Research Division

Gur Talpaz - Stifel, Nicolaus & Co., Inc., Research Division

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

Sameet Sinha - B. Riley Caris, Research Division

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

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

Operator

Greetings, and welcome to the Brightcove Second Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Brian Denyeau of ICR. Thank you, Mr. Denyeau, you may begin.

Brian Denyeau

Good afternoon, and welcome to Brightcove's Second 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, 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 third 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 variety of risks and uncertainties that could cause actual results to differ materially from expectations.

For a discussion of material risks and other important factors that could affect our actual results, please refer to those contained in our most recently filed annual report on Form 10-K and as updated by our subsequently filed quarterly reports on Form 10-Q and our other SEC filings.

Also, during the course of today's call, we will refer to certain non-GAAP financial measures. There's a reconciliation schedule showing GAAP versus non-GAAP results currently available on our press release issued after the close of market today, which is located on our website at www.brightcove.com.

In terms of the agenda for today's call, David will provide a summary result -- a summary review of our financial results, market opportunity, as well as an update on our operations and product innovation. Chris will then finish with additional details regarding our second quarter 2013 results as well as our guidance for the third 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 second quarter 2013 earnings call. We're pleased to report second quarter results that were ahead of our expectations from both a revenue and profitability perspective. Our second quarter results were highlighted by revenue of $26.9 million, which represents growth of 24% on a year-over-year basis.

Through the first half of 2013, the trend of consumers watching more and more digital content across an increasingly complex variety of devices has continued to become more mainstream. It is now very common to see people watching their favorite shows on a tablet while sitting in a coffee shop or sitting at home, clicking on videos as they shop for new - for a new car or clothes.

The increasing ubiquity of digital video content, which is being driven in part by the greater number of video-enabled devices and continued improvement in broadband and mobile Internet download speeds, has turned digital content into a constant presence in our lives that can be accessed anytime and anywhere. Having a strategy in place to take advantage of this trend is a top priority for companies across a wide number of industries.

As customers look at the digital video content landscape and the requirements necessary to deliver the world-class user experience customers expect, they quickly come to realize it is a costly and time-consuming problem with a steep innovation curve. We have seen customers increasingly recognize that this is a problem they're ill-equipped to handle on their own, and they are looking for a third-party provider whose expertise they can rely on.

This is the sweet spot for Brightcove, as our market-leading Video Cloud online video platform and Zencoder cloud encoding service are widely recognized as the most comprehensive and scalable solutions today. Our focus in the company is to continue leading the pace of innovation in this market and to be the trusted partner of any company or organization looking to improve their engagement with customers through digital content.

Our second quarter performance reflected solid operational execution across the company and was highlighted by exciting new customer wins, including great consumer brands like Allstate Insurance, Campbell Soup Company and IBM, and leading media companies like Yahoo!7, The Motley Fool and Asahi Shimbun. In addition, we saw good upsell activity with existing customers like Intel and Astral Media.

Yahoo!7 was another exciting media win for us and continued the strong performance we have had in Australia in recent quarters. Yahoo!7 is a leading -- is one of the leading online destinations for Australian consumers and advertisers and is the joint venture between Yahoo! and Seven Network, the highest-rated television broadcaster in Australia.

Yahoo!7 plans to use Brightcove across all facets of their current and future online video initiatives, including their catch-up service, Plus7, and their breaking news services.

Brightcove is now powering the online video efforts of all 3 of the top commercial free-to-air broadcasters in the Australian market, evidence of our strong global presence, as well as Brightcove's recognition as the market leader with the largest digital content producers.

Asahi Shimbun is based in Japan and is the second most circulated newspaper in the world and eighth largest worldwide in terms of its combined digital and print circulation. They plan to use Video Cloud to reach, engage and monetize their audience with compelling video content, including their exclusive coverage of the upcoming National High School Baseball Championship, one of the most popular annual sporting events in Japan. This is an important deal we've been working on for some time. I think it underscores the global demand to deliver compelling digital content across media organizations.

We also had some exciting wins in the consumer brand area, with companies like Campbell Soup Company and Allstate, who are both using Video Cloud to facilitate their internal communications across their tens of thousands of employees.

From an operational perspective, we continue to focus on ramping the productivity of our recent sales hires, and we continue to have open positions that we are actively looking to fill as we expand the overall size of our sales organization. We are pleased with the results we have seen from our media sales group, and we have a strong pipeline of opportunities in this area of our business around the globe.

During the quarter, we previewed much of our new, exciting technology development at our annual PLAY user conference in Boston. This year's event was attended by hundreds of customers, partners and industry leaders and was really a fantastic gathering of thought leaders in the digital media space.

We received positive feedback on the innovations we are bringing to market and also heard about what our customers are looking for in the future to be even more successful with their digital content initiatives. This feedback is critical in guiding our future product development efforts, and we are working against an aggressive product road map to enhance the functionality of Video Cloud and Zencoder, as well as make more of Video Cloud's individual components available to customers on an à la carte basis.

An exciting product we showcased at PLAY was Video Cloud Live, a multi-bitrate live streaming module that's integrated with Video Cloud Studio. Video Cloud Live will enable marketers and media companies to manage the entire life cycle of a live video event, access real-time analytics and create video-on-demand assets from live events with their existing Video Cloud workflow.

There is growing demand from customers to have the ability to deliver live video, and we have received a very positive response in the few weeks since this product has become generally available, including several small early customer wins.

During the quarter, we also brought our new Analytics module to general availability and it is available to all our customers worldwide. We think this is a significant improvement from our legacy analytics capabilities that will enable customers to more quickly and accurately target and adjust their digital content offering to maximize their effectiveness.

Our new Analytics module offers a number of significant improvements, including real-time views of data, engagement scoring, an API to access data for custom reporting and an elegant, new HTML5 user interface, which improves the usability and enables usage on mobile devices.

We are now also offering support for Twitter video cards, which enables video content to be viewed directly in the update stream on twitter.com without having to follow a link. We have had good customer interest in this functionality and already see major brands, like the BBC Worldwide and weather.com, take advantage of this new feature.

During the quarter, we also enhanced our product team by bringing in Thomas Nielsen as our new SVP of Products. Thomas brings more than 2 decades of technology experience, most recently as CEO of RealNetworks. And prior to that, he has held executive positions at Adobe and Microsoft. In his role at Brightcove, Thomas will be responsible for all our product strategy, delivery and future innovations.

Before turning it over to Chris, I wanted to note a filing we made earlier today. Jeremy Allaire is an entrepreneur at heart and is transitioning to a part-time schedule so he can pursue other interests. Jeremy will remain Chairman of our Board of Directors.

To summarize, our second quarter financial results were above our guidance, and we continue to make good progress positioning Brightcove to be one of the major beneficiaries of the secular shift to digital content being delivered by the cloud. We believe the product enhancements we have brought to market further our competitive lead, and we are focused on investing in our business to capitalize on 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 was just mentioned, our quarterly revenue and operating results exceeded guidance from both a revenue and profitability perspective. For the second quarter, total revenue was $26.9 million, a 24% increase from $21.6 million in the second quarter of 2012 and ahead of our guidance of $25.7 million to $26.2 million.

Subscription and support revenue of $25.6 million was up 23% year-over-year. Professional services and other revenue was $1.3 million, which was below the $1.5 million contribution we expected during the quarter. This was driven primarily by the timing of professional services engagements, which can be lumpy and difficult to predict on a short-term basis.

Turning to revenue mix. Our premium offerings generated $24.2 million of total revenue, representing a 22% year-over-year increase, while our volume offering generated $2.7 million in revenue, a 47% increase from the second quarter of 2012.

On a geographic basis, we generated $15.8 million of revenue in North America for the quarter, which was up 16% year-over-year and represented 59% of total revenue. Europe recorded $6.5 million, a 22% increase and 24% of total revenue, while Japan and Asia Pac generated $4.6 million of revenue for the quarter, up 71% year-over-year and representing 17% of our total revenue.

From a vertical perspective, non-media customers represent 62% of our second quarter revenue and grew 29% on a year-over-year basis, while our media customers represent 38% of our revenue and grew 18% year-over-year. We'd also point out that over time, as video has changed in dynamics in a number of industries, it has become harder to make a clear distinction between media and non-media companies. We have seen strong performance in industries that are closely related to media but are included in our non-media segment.

Turning to streams. As of June 30, our year-to-date average monthly video streams were 919 million, which was up from 853 million at the end of the first quarter and represented 36% growth on a year-over-year basis. As we've mentioned in the past, 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 103% for the quarter, which represents an all-time high. The strength in our dollar retention rate in the second quarter was driven by strong upsell, particularly in early contract renewal that contained a significant upsell component. As we've talked about in the past, some customers who trip into overages early in a contract will choose to renew early with a higher level of entitlements. This contract renewal represented a meaningful portion of the outperformance versus our historical average, and we continue to target a dollar retention rate in the 93% to 94% range going forward.

Looking at our customer count. We ended the second quarter with 6,386 customers compared to 4,697 at the end of the second quarter of 2012. Breaking this down further, we ended the quarter with 1,706 premium customers, an increase of 16 from the end of the first quarter. We had 4,680 volume customers at the end of the quarter, which was up 49 over last quarter.

It's important to note that while our net premium customer adds in the second quarter were lower than in recent quarters, we did have a solid quarter from a dollar sales perspective. Our team did a tremendous job upselling into our installed base, which you can see from our dollar retention rate.

As we've stated previously, while net premium customer adds is an important metric, our primary focus is on maximizing the amount of revenue our sales team can generate.

Also, in the second quarter, we had approximately 35 volume customers upgrade to premium, including American Standard and art.com. Year-to-date, we've had nearly 70 upgrades, and we continue to view our volume business as an attractive pipeline into our premium offerings.

Moving down the P&L. Our non-GAAP gross profit in the second quarter was $18.1 million, an 18% increase from a year ago and a gross margin of 67%. Subscription and support revenue represented approximately 95% of our total revenue and had a 71% gross margin, while services revenue represented approximately 5% of our total revenue and a negative 14% gross margin. We expect to realize additional gross margin expansion over time due to the inherent leverage in our ratable subscription model, and we continue to target approaching breakeven in our services business during the fourth quarter.

Non-GAAP loss from operations was $874,000 in the second quarter, an improvement compared to a loss of $2.1 million in the second quarter of 2012 and better than our guidance of a non-GAAP operating loss of $1.4 million to $1.7 million.

Non-GAAP net loss per share was $0.04 based on 28.2 million weighted average shares outstanding, which exceeded our guidance of a loss of $0.06 to $0.07 per share. This also compares to a per share loss of $0.10 on 27.3 million weighted average shares in the year ago period.

On a GAAP basis, our gross profit was $17.7 million, operating loss was $3.3 million and our net loss per share was $0.12.

Turning to the balance sheet. We ended the quarter with cash, cash equivalents and investments of $30.5 million compared to $28.6 million on March 31. DSO in the quarter was 64 days, which is down from 78 days in the first quarter and 74 days in the year ago period. Deferred revenue was $22.6 million, up 39% year-over-year.

From a cash flow perspective, we generated $2.8 million in cash from operations and invested $800,000 in capital expenditures during the quarter, which equates to a positive free cash flow of $2 million for the quarter and compares to a negative $2.1 million in the year ago period.

Our free cash flow result in the second quarter was better than our expectations and benefited from strong cash collections performance and the timing of capital purchases. For the full year 2013, we continue to expect to generate between $1 million and $3 million of free cash flow.

Finally, I'd like to provide our outlook for the third quarter and update you on our outlook for the full year 2013. For the third quarter, we're targeting revenue in the range of $26.8 million to $27.3 million, which represents growth of 21% to 24%. We're targeting a non-GAAP operating loss of $900,000 to $1.2 million. Based on 28.3 million shares outstanding, we expect a non-GAAP net loss per share of $0.05 to $0.06.

On a GAAP basis, we're targeting a net loss per share of $0.14 to $0.15, which includes forecasted stock-based compensation expense of $1.6 million, merger-related expenses of $375,000 and amortization of intangibles of $430,000.

For the full year, we're raising our revenue guidance to a range of $106.3 million to $107.5 million and a non-GAAP operating loss of $3 million to $4 million. We also expect -- we also continue to expect that we will generate a non-GAAP operating profit in the fourth quarter.

We expect our non-GAAP net loss per share to be $0.13 to $0.18 based on 28.4 million shares outstanding. On a GAAP basis, we're targeting a net loss per share of $0.48 to $0.53, which includes forecasted stock-based compensation expense of $6.6 million, merger-related expenses of $1.6 million and amortization of intangibles of $1.7 million.

In conclusion, we're pleased to have exceeded our financial guidance for the second quarter and are confident in our ability to deliver against our upwardly revised full year plans. We remain focused on building upon our leadership position in the dynamic OVP market and believe we are well positioned to capitalize on the multibillion dollar market opportunity we are targeting.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Jennifer Lowe of Morgan Stanley.

Jonathan Parker - Morgan Stanley, Research Division

It's actually Jon Parker calling in for Jennifer. Nice quarter. It's really, it's great to see the top line grow to sustain the type of margin and cash flow outperformance that you guys put up there. So nice job on the quarter.

Christopher Menard

Thank you.

Jonathan Parker - Morgan Stanley, Research Division

And maybe start out with, you called out some nice wins with the dedicated media team that you were trying to build out last quarter, and it seems that, that's certainly continued this quarter with the Yahoo!7 deal that you called out and a few others. Can you help us think about how that should continue to ramp over time and then the sort of growth that could help sustain in the media business? Then maybe playing into it, you did sort of call out that, that premium add number was a little bit lighter than it has been in recent quarters. But obviously, you talked about trying to maximize the dollar value there. Can you talk about -- maybe about how that strategy of focusing more on the media adds might play into that and how we should think about that add number just sort of progress throughout the year?

David R. Mendels

Sure. Thank you, appreciate that. So yes, we feel great about the quarter and a lot of good things happened. So the media team is starting to get some traction. We've talked about that a couple of times. We started that at the beginning of the year, building out more of a dedicated team of people with a vertical focus. We hired some people from the media and broadcast sector to help support that team, and we're seeing some good results. In the first quarter, we talked about Network Ten. In the second quarter, we talked about Yahoo!7. We also mentioned a customer that grew with us, Astral, which is a Canadian broadcaster. And that was another significant upsell for us in the quarter. So that team, we do feel, is getting some traction. It is hard to guide at that level, and so we let -- we guide at the macro level because those deals are going to be lumpy. We do see good pipeline. We see a lot of opportunity all around the world with broadcasters and other significant media organizations that are trying to bring more and more of their content online. And I think we are in a very strong leadership position to continue to get good wins. But trying to guide which specific -- how many of such wins -- it's difficult on a quarter-by-quarter basis. They do tend to be longer-term deals, very different dynamics than our volume business. They often involve our services organization in terms of helping to build complex integrations and things like that. So they take a little bit longer, but we do feel like we have good tractions and good pipeline. I'm going to let Chris jump in, talk a little bit about the net adds.

Christopher Menard

Yes, sure. Thanks, David. I think just to reiterate, we think we just had an outstanding quarter, beat the revenue number, raised the guidance. Now the low end of the guidance is above the previous high end of the guidance. Revenue retention rate over 100% for the first time is a record for us. But when you look at the net premium adds, it is a little disappointing. It is a little lower than we've seen in previous quarters. I think there's a couple of things going on there. Remember, it's a net number, so it's not a gross add number. And what we saw this past quarter is we saw a little bit more attrition, especially at the low end of the premium customers. So what we tend to see is an average premium customer for us generates about $54,000 a year in annual license revenue, and that's up about 4% year-over-year. When you dig into some of the churn we saw, we saw that at the low end of the premium side, customers averaging more than -- about -- excuse me, about $20,000 per year, we saw a pickup or a slight increase in those customers churning out, and that led to a lower number of net new customers. But overall, we had a great quarter. We beat all of our internal metrics, and we're really happy with the overall results.

David R. Mendels

Yes, I'll just add, just going back to your question, because you tied it in with the media vertical. And I think you were hitting on a point that I think is worth being a little bit more explicit about, which is as we invest in going after larger deals, you can expect to see some quarters where we are able to being raised on the revenue, like we were this time, without having a large number of net adds on the count side. And so as we go after some of these bigger deals, and some of these deals are quite large, you might see us have a lower count but that still could be healthy growth for the business. From an internal perspective, we incent our sales organization and focus our sales organization on driving revenue growth for the long term, not focus on customer count. So when they see opportunities to go after these big deals and as we focus teams around going after these big deals and do large deal pursue kind of activity, that is the kind of result that could occur.

Jonathan Parker - Morgan Stanley, Research Division

That's really helpful color. I appreciate that. And any -- the second question, which may tie into the part of the prior answer you're talking about, Chris, sort of the low end of the premium market, I mean, what is the competitive environment looking like right now? Are you seeing any changes? Are those customers that you've sort of alluded to at the lower end of the premium side, are those sort of competitive displacements? Or is it just customers being more sensitive to the macro? Or sort of maybe give a little bit more color on whether those 2 things tie together or not.

David R. Mendels

Sure. The -- let me start by saying that as we lose customers, we rarely lose them to another OVP competitor. I can count the number of losses to an OVP competitor on a small part of one hand. It's not -- that's not the primary reason. The macro situation or the business model situation of that company is a significant variable. A lot of companies have ambition to get into video but then get out of video. There is at the low end, at the low end of low end, people that choose to go with free social sharing sites like a YouTube, so there's competition there. It is a very competitive market, to step back a little bit. We see a lot of competitors. We see at the high end, in particular, competition against DIY. We have a couple of private companies who aspire, I think, to be like us that we compete with. But we don't compete with any one of them in a majority of our deals in a quarter. Each of them we might compete within a handful or a couple of handfuls of deals. We also compete with a lot of regional competitors, different competitors in Germany and in Japan and in Australia and in the Nordics. And then there are some niche players who don't really compete with us on an apples-for-apples basis but compete with a part of what we do and so change the value equation. So it is a complex and fragmented competitive landscape, but it has not changed significantly. We still see a wide range of competitors, we still see good competitive win rates, and we feel very good about the position we're in.

Jonathan Parker - Morgan Stanley, Research Division

That's great. And maybe my last question. You don't really hear as much mention of Zencoder. I know at your conference, you had a lot of customers that were really interested in it and were talking about it. And so kind of curious about how is that part of the business doing compared to your expectations. What are you seeing in terms of early adoption of the live transcoding options? Any sort of commentary on that would be great.

Christopher Menard

Sure. It's going really well. I think we announced it just a year ago. At the time, we said that we thought it would do about $4 million of revenue for this calendar year, it's on track to do that. And we probably have 2 hands full of 6-figure customers at this point. And so we're really happy with the progress we're making. We've got a good pipeline, and we've had good customer wins each quarter.

Operator

And the next question is from Tom Roderick of Stifel.

Gur Talpaz - Stifel, Nicolaus & Co., Inc., Research Division

Sure. This is Gur Talpaz on for Tom. So you saw a really nice quarter out of Asia Pacific in 2Q. Can you talk about what you've been doing there over the last few quarters to address some of that growth? I mean, Asahi Shimbun seems like a pretty significant win that could grow meaningfully, and then Yahoo!7 as well. So maybe talk about what you've been doing there to kind of help drive that growth.

David R. Mendels

Sure. I can talk a little bit about that, thank you. So first of all, thank you for highlighting that. It is something that we're proud of. We've had good growth in the region. We brought in -- the Asia Pacific region, as you may know, is our newest region. It's only about 2.5 years in, I think, as part of the company. We brought in a very strong leader of that for the Asia Pacific region about 2.5 years ago. And about 9 months ago, we asked him also to consolidate in the Japan region. We had run that as a separate region. We also, as you may know, had gone from a structure where we set up a joint venture with a couple of key partners in Japan in the early years of our penetration of that market, and what we did is we bought that back and we've got complete control of it, and we've taken more of that business direct to Japan. So we've got more of our hands on the customers. So I think you got a combination of, in Japan, closer to the market and a little bit less reliant on partners, which I think has been very effective for us. We also have a very strong leader, a gentleman named Dennis Rose, who I give a lot of props to. We've built out a strong team. I think it's really a credit to the people in each of the countries that we've been able to see some good wins. And we get good momentum and then you get reference ability among that community.

Gur Talpaz - Stifel, Nicolaus & Co., Inc., Research Division

Great. And then with regards to net adds, it seems like over the last 2 quarters, there's been a pretty meaningful shift here to focus on quality versus quantity in terms of number of customers. Is that a fair assumption to make?

Christopher Menard

Yes, I think that's fair. I think as David said, we incent the salespeople based on revenue that they bring in. And so we're going after the dollars, the deals that have -- the bigger deals on the media side and the deals we think we can close fastest. We're doing a great job of upselling into the base, and some of those are bigger than some of the smaller deals that we might capture with some of the new logos. And so we're 100% focused on the P&L, continuing to generate cash as we did this past quarter and continuing on the path to profitability for the fourth quarter.

Gur Talpaz - Stifel, Nicolaus & Co., Inc., Research Division

Great. And then, Chris, maybe you can help me reconcile. You put up a really outstanding number in terms of dollar renewal rate, and you alluded to some churn on the low end of the premium side. Can you help me reconcile those 2 things, just because it seems like maybe you had a couple of key customers that came back and really re-upped at a pretty high rate here? Is that fair?

Christopher Menard

Yes, that's fair. I think we had a couple of really meaningful upsells in the quarter that helped to drive us over 100%. And that's why I said in my prepared remarks, I want people to think that we're still going to be around that 93%, 94% that we've run historically. I'd love to tell you we're going to stay above 100% every quarter, but I can't guarantee that yet. So -- but I'm pretty happy anytime we're in that 93%, 94% range.

Operator

The next question is from Terry Tillman of Raymond James.

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

First question is on the North America business. I just don't recall if it was a tougher comp last year, if you had something kind of outlier-like last year. But if I wrote my notes right here, it was up 16%. That's lighter than the other regions, granted it's a higher base. But anything on the demand side that's different in North America versus the other geos? Or anything on the sales execution side that's different versus the other geos?

Christopher Menard

No, I think part of it is it's a bigger base. It's a bigger number to begin with. We're really happy with how the North America team did. In any given quarter, depending on the geography of where things like the professional services revenue fall or where the overages actually fall, that number can move around a little bit. But nothing out of the ordinary.

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

Okay. And Chris, you talked about how -- you had a higher bogey for the pro services. And granted, that's not as strategic as the subscription, but it was interesting that you called that out. And there was a little bit -- or there were some higher churn in the lower end of the premium business, yet the guide is moving meaningfully higher. What has happened in the full year guide? Have you tweaked any assumptions around churn in part of that premium business? And what about that service revenue? Do you assume that, that actually doesn't kind of come -- catch up in third quarter? Or how do we think about some of those puts and takes on the full year guide?

Christopher Menard

Yes, that's fair. So first, on the model and how we came up with the guidance, there's no change to the methodology. We're not -- we're forecasting, I think, first, on a forecast standpoint, I'm expecting we go back to historical renewal rates. So somewhere in that mid-90 range. You see some pickup because when the revenue retention rate jumps as high as it did last quarter, you pick up revenue that I didn't have in the forecast for the back half of the year. So that definitely helps. As we said, we had a really good sales execution quarter, which definitely helps as you look at the back half of the year. In terms of the services revenue, we're going to be in the ballpark of around $1.5 million for the third quarter. We did miss it by a couple of hundred k last quarter, but it's really 1 or 2 deals that shifted. I think we came in at $1.3 million and change. So a very small miss compared to what I had mentioned earlier.

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

Okay. Okay. And then can you remind us in terms of versus the end of last year, the percentage growth in your sales teams? And I know you have different flavors of sales teams, but just how much growth we've seen year-to-date? And when do we see potentially an inflection point or a productivity kind of inflection point for those new hires? Third, fourth quarter or is it more of a '14 event?

Christopher Menard

We've been hiring throughout the year. It's not a number we want to update until the end of the year, just because it moves around so much every 90 days. But we're obviously really happy with the sales team that we have and the people we brought on board. We raised the guidance twice now over the last 2 quarters. So the people we have are getting -- the new people are getting productive, and the people we have with us are doing a great job. Otherwise, we wouldn't be able to do that.

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

Okay. And just my last question. It's going to be the easiest for either of you 2 guys. But Video Cloud Live and then Analytics. I would love to hear kind of philosophies around these add-on products. Are these separate on price lists? Or in some cases, will they actually just be features that make Video Cloud more competitive? So, I'd love to get a view on either of those 2 products and how they contribute, if they do separately, on contract value going forward.

David R. Mendels

All right, no problem. So happy to answer that. I think you asked about 2 different pieces, the Analytics module and the Video Cloud Live module. And those are different. The Analytics module is a feature of the Video Cloud suite. And as such, it does exactly what we think -- what you just said, which is we think it gives us a much more competitive foundation, both today and what we can now build on top of it, in terms of what we can offer our customers in terms of the insights they can get into their video views, engagement, geographic, devices, platforms, et cetera. We really like what we've built. As you may know, we had, up until we released the new system, been reliant on a third-party analytics thing. It was built into the system. It was seamlessly integrated. But it had not had advanced significantly over several years. And now we think we have a best-in-class, modern system that we can really build on and add a lot of features to. And it's a real-time system, so people can understand -- as people are watching videos, they can understand how those views are occurring, where they're occurring, where they're coming from. As well as, it's got a really well-designed, modern API. And what that means is that people can write software and write reports that pull things out of it and match up that data with other analytics data, things they might have from an Omniture or from Google, from comScore. So we think it's a really strong set of features. It's a -- also a platform foundation on which we're going to keep building and adding features to that adds a lot of competitive advantage to the product over time. The Video Cloud Live module is a little bit different in that, that is a commercial product. That is something that we are selling as an add-on to Video Cloud. And it's sort of a complete suite of tools for that business person who is not a super technical person who needs to set up and run live events. And it lets you set up the event, schedule the event. It does, in the background, a whole bunch of complex configuration stuff to get that going over the CDN, the -- what is that -- Akamai or someone else. It helps you manage the event while it's happening. It gives you analytics on it. And then when that event's over, you can slice that thing up and put it into your video-on-demand library inside the Video Cloud. So it's really a seamless workflow. It's very high-quality live transcoding, leveraging the Zencoder product that we talked about last quarter. And we're pretty excited about it. It's early. So it shipped right at the end of the quarter. We do have some customers that are still small initial customers. We think it's a product with a lot of potential. It's something that we see -- every kind of customer is doing events. We see marketers that do events to promote their goods. We see tech companies doing press events. We see media companies doing concerts. We see newspapers doing live interviews. It's really very broad and horizontal, the kinds of people using it. And so we're excited about the opportunity. And as Chris talked about earlier, with that revenue retention, the way we get -- we've raise that over time and have more quarters that are -- in fact, last quarter -- is by having more to sell and being able to go back to our base with new products as well. So we're excited about the opportunity it brings us.

Operator

The next question is from Sameet Sinha of B. Riley.

Sameet Sinha - B. Riley Caris, Research Division

A couple of questions here. If I look at your guidance and look at what the in-slide fourth quarter guidance, I think according to my math, it's showing 16% year-over-year revenue growth. So can you -- is that conservatism? Or do you -- is there something in the fourth quarter that we should be aware of that's causing the growth to slow down? Secondly, in terms of gross margins, even in the subscription business, it seems to be trending lower. Can you talk about the dynamics there? And the last question is, if you can provide some more information on the sales side? And how many positions do you have open? And how many do you have now in terms of the quota-carrying reps? And is your media team now fully staffed as you had indicated earlier?

Christopher Menard

Yes, so why don't I take those? Now first, on the guidance. Again, we did raise the guidance for the full year. The top of the guidance is up meaningfully. The bottom of the guidance is now ahead of the old top of the guidance. No change in methodology. We take a look at what we expect to renew at historical rates. We take a look at what we think we're going to sell within the quarters. We look at what's running out of backlog, which is the majority of what we're guiding to. We have tremendous visibility. I can see over 90% of the revenue coming into this quarter. And then we meet with our pro serv team to get a feel for the contracts that are signed and what they're going to deliver. And so that's how we come up with the number of the $106.3 million to the $107.5 million for the year. We don't actually guide, as you know, to the fourth quarter, so it depends on where the third quarter runs -- comes out. I think your second question was in terms of the gross profit. We did see a little bit of a dip down in Q2, a little bit more than 71% compared to about 73% the prior quarter. There's just some incremental expenses in there related to things like our production ops, our hosting centers and our customer support areas. I do think it -- we should rebound back a little bit in the third quarter, maybe not meaningfully, but back into that 72-ish percent range that we've seen historically. But there's nothing fundamental or there's no big shift going on in that area at this point. I think the third one was in regards to the salespeople. As we said on the last call and I said a few minutes ago, it's just -- it's not a number we're going to update every quarter because it can vary depending on what's happening within that organization. We do have a bunch of open sales positions up on the website. We're actively trying to fill all of those spots, and we'll give an update at the end of the year for how we turned out.

Operator

The next question is from Brendan Barnicle of Pacific Crest.

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

David, I think at PLAY you guys mentioned that you were going to start selling some of the suite modules separately. And I wanted to make sure I remembered that right. And was that just the Analytics product that went GA this quarter? Or is that other products as well? And I thought some of the strategy there was as a way to move into some of the big media companies that already had some of the portions of your suite. Did you see any change around that strategy during the quarter?

David R. Mendels

No. So it's a long-term strategy, that's very much right. You caught that correctly. What we, just to reiterate for some other folks who may not have kept up with it, what we talked about is that historically, we've been known for our Video Cloud product, which has been an end-to-end suite of everything you need, from ingestion to content management to playback to analytics in a single end-to-end workflow. But that as we deal with some of the higher-end media customers and some of the more complex workflows, there are use cases where people want to buy on more a la carte basis and integrate into our other systems. So the first piece of that actually goes back to the Zencoder acquisition, which gives us transcoding and now also live transcoding, as a stand-alone a la carte product that we charge for separately and on a usage basis around the transcoding. And that is available separately from Video Cloud. We're also leveraging some of that technology with Video Cloud now. And over time, it'll be completely integrated in. So that's a good example of something that will be both part of a suite and standalone, both the video-on-demand transcoding and the live transcoding. The new live module is a partial example of that strategy, in that it's available as a separate module for people who want to use live. And other examples of that will happen over time. We -- when we were laying that out as a strategy, we weren't saying that it's going to happen overnight, but we were giving people direction as to the kinds of things we're going to make possible. And so the way we've been building the platform is exposing all of the core systems as a set of REST APIs. And what that lets you do is expose it in different ways and package it or assemble it in different ways for different customers, so people can integrate it with different systems. So it's a great direction, I believe, and we've gotten good feedback on it. And we're part of the way there with what we've done with Zencoder, and you'll see a lot more over the next quite a few quarters. We'll be working on this.

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

So just to be clear, the growth you had in revenue from media companies, which grew 18% this quarter, up from 13% last quarter, didn't really have anything to do with this new strategy? That just had to do primarily with just the new sales distribution you've added?

David R. Mendels

Yes. Not per se. You're correct, yes.

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

Great. And then, Chris, you mentioned that you've still got a number of open positions on the sales side. How are you guys finding the hiring environment for sales talent right now?

Christopher Menard

Yes, I'm going to defer to David because he's closer to the hiring process.

David R. Mendels

Sure. It's -- we -- we're pretty happy with the people we've been able to hire. I think in every category, finding great people is always hard. And we're in tough markets, and so it's not like you find -- you put out a job and you get the person the next day, because we're only looking to hire the best of the best. But I think we've done very well on the sales side, and I'm very happy with people we've been able to hire. So I'd say the hiring environment is tough, but tough like usual, nothing that is worrying us particularly.

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

And any difference in the hiring environment for folks on the R&D side than on the sales side?

David R. Mendels

Oh, sure. I would say on the R&D side, it's tougher, that the hiring environment where our key R&D facilities are, which is San Francisco, Seattle and Boston, is extremely competitive. And on the sales side, obviously we hire in much broader geographies that are less competitive. And so it is tougher on the R&D side. I think everyone in the industry would say that in these markets. That said, I feel very good about the hires we've made this year. It's -- we've hired a great group of people. We're brought on quite a few folks into the R&D team. And so again, it's not something that I would raise a red flag about, but I certainly would commiserate with everyone else in the industry about how hard it is to hire great software engineers in hot markets.

Operator

The next question is from Steve Frankel of Dougherty & Company.

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

Just to go back to the quality over quantity discussion earlier, could you maybe give us an idea of kind of what the average deal size in the pipeline looks like maybe on a year-over-year basis?

Christopher Menard

Sure. Average deal size for deals we're actually closing hasn't changed much. A first-time license sale is still somewhere in the mid-$20,000 range. Obviously, we've got a big wide scope of customers. We have some customers that are in for as little as $10,000 in premium and some customers that are greater than $1 million at this point. The pipeline is looking really strong. I don't know the exact year-over-year number from where we are today, but it's better than we were at the start of the year. And overall, we're feeling pretty good about the opportunities that we're working on for the back half of the year, and that's both some of the midsized deals and some of the larger deals.

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

All right.

And again, now the strategy is focused on a few elephants and a bunch of midsized deals and just try in general to work your deal size up?

Christopher Menard

Yes, I think that's fair. I think what we said at the start of the year where we were going to do a little bit of a pivot away from focusing so much on the volume business and put some of those dollars towards the premium business as we do incremental marketing into that area, are starting to pay off. And again, we focused the sales team on revenue creation and revenue dollars, not going after every $10,000 customer to keep the customer count high.

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

And last quarter, you've called out kind of the decline or the churn in the lowest of the volume here, where you got rid of a promotion. Did that reoccur this quarter? Did you have a bunch of those customers go away? And even though your retention rate was great, was that -- was there a headwind to that as well?

Christopher Menard

Yes. So on the volume business, we grew by about 50 customers overall, but we did lose about 110, roughly, of those $5 customers. But we made it up with other categories and other components. It's interesting, because you start to see that because the revenue per volume customer has actually gone up a little bit. We used to be around the $175 per month, and now it's right around $190 per month. And that's because as we're bleeding off the $5 customers, we're replacing them with customers more in the $100 to $200 range.

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

And where is total headcount?

Christopher Menard

345.

Operator

Thank you. We have no further questions in queue at this time. I'd like to turn the floor back over to management for any closing remarks.

David R. Mendels

Thank you all for joining us. We feel very good about the quarter. We're excited that we were able to meet and exceed expectations and raise our guidance for the rest of the year. We're looking forward to another great quarter. So thank you for joining us today. We look forward to getting back together. Thank you.

Operator

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Brightcove (BCOV): Q2 EPS of -$0.04 beats by $0.03. Revenue of $26.9M (+24% Y/Y) beats by $0.9M. (PR)