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Envivio, Inc. (NASDAQ:ENVI)

F2Q14 Earnings Conference Call

September 4, 2013 5:00 PM ET

Executives

Alice Kousoum – Investor Relations

Julien Signès – President, Chief Executive Officer and Co-Founder

Erik Miller – Chief Financial Officer

Analysts

William Morrison – Oppenheimer & Co. Inc.

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Envivio Second Quarter 2014 Earnings Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for question. (Operator Instructions) This conference is being recorded today, Wednesday, September, 4, 2013.

I would now like to turn the conference over to Alice Kousoum of Investor Relations. Please go ahead, ma’am.

Alice Kousoum

Thank you, Sheryl. Good afternoon and welcome to Envivio’s second quarter fiscal 2014 financial results conference call. Joining the call today are Julien Signès, President and CEO; and Erik Miller, CFO. The agenda of today’s call includes commentary from Julien, followed by discussion of the financial results from Erik. This afternoon, Envivio issued a press release announcing its second quarter financial results, which is available on the company’s website at envivio.com. This call is being broadcast live over the Internet and the audio of this call will be available on the Investor Relations page of the company’s website.

I’d like to remind everyone that this conference call will contain forward-looking statements that are not historical facts, but rather are based on the company’s current expectations and beliefs. Such forward-looking statements are not a guarantee of performance and Envivio’s actual results may differ materially from these forward-looking statements. Several factors that could cause or contribute to such differences are described in detail in the Risk Factors and other sections of our SEC filings as well as with our earnings release.

Envivio undertakes no obligation to publicly release or otherwise disclose the results of any revision to these forward-looking statements that may be made as a result of events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. In addition, today’s discussion includes non-GAAP financial measures that Envivio believes may be important to investors as a metric to assess the operating performance of its business. Reconciliations to the most directly comparable GAAP financial measures are included in a table attached to the earnings release on Envivio’s website.

And now, I’d like to introduce Julien Signès.

Julien Signès

Thank you, Alice. Joining me today on the call is Erik Miller, Envivio’s Chief Financial Officer. We are encouraged with our results this quarter. Revenue for the second fiscal quarter was $11.5 million, up 55% sequentially and 7% year-over-year. Our strong sequential revenue results were driven by large orders from two tier 1 cable customers in the United States, including one new customer.

In the quarter, new tier 1 customer contributed 30.2% of revenue and our existing tier 1 cable customer contributed 18.9%. Revenue from the Americas was $6.2 million, compared to $2.6 million in the prior quarter and $3.5 million in the second quarter of the prior year. Additionally, an existing tier 1 European customer contributed 13.4% of revenue in the quarter. We attribute this quarter’s improved results to both the changes we made to our North America sales organization beginning in fiscal Q4 of last year and the compelling differentiation of our unique products.

We’re encouraged by the pipeline for upcoming projects with both new and existing customers, and increased interest in software-based solutions. We also had solid gross margins in the quarter of over 68%, up from 63% in Q1 and 62% in the prior year. The increase in gross margins was driven by the high volume of software license orders we received from our two tier 1 cable customers, who are deploying our products on data center blade servers.

We see our improved execution and recent changes in our sales organization, resulting in more customer engagements and increased sales pipeline, including a number of tier 1 content and service providers in North America and internationally. However, I would like to note the timing and extent of large projects we may receive from these engagements could cause our revenue and gross margin to fluctuate on a quarterly basis.

Now turning to some of our customer highlights. This quarter, one of our customer wins including a leading pay TV operator and content provider in Europe. On solutions we placed part of their previous, legacy hover-based TV system with an end-to-end software-based solution that supports both the existing HD and SD TV service as well as streaming to Internet connected devices. This new customer visiting our converged headend solutions for the satellite and cable channels while simultaneously creating outputs for the voice mobile solutions they require.

In China, Qinhuandao Broadcast Network, part of the Hebei Broadcast Network Group selected our Muse encoding software to power the new video services. The services include multi-screen and time-shifted TV that offer the HD and SD video channels to connected TVs, set-top boxes, PCs, tablets and mobile phones. In fact, the flexibility of our solution to support services from HD TV to mobile and the cost savings that our solution generate, were crucial in the customers’ selection of Envivio.

And in Ukraine, VOLIA, the country number one pay TV operator, selected our new transcoder for its new over-the-top Internet TV services. Our new transcoders offer them flexibility to integrate their pay TV and OTT platforms and allow them to serve a large number of viewers around the country who want to enjoy a more personalized anytime, anywhere TV experience.

Other customer highlights during the second quarter include the addition of 13 new customers with 62% of revenue coming from existing customers. Several tier 1 customers around the world were actively engaged with Envivio in HEVC field trials as part of Envivio's HEVC Early Access Program. Customers testing Envivio HEVC encoders include U.S. cable operators and telco/satellite operators in Asia and Europe; multi-screen and IPTV expansions with tier 1 customers in Australia, England, France, New Zealand, Saudi Arabia and Singapore.

Turning to our products. Today, we announced additional video quality and compression efficiency enhancements to our Muse encoders, including collaborations with HEVC decoder vendors and enhancements to our statistical rate control for variable bit-rate multiplexing and distribution.

And next week, Envivio will participate in the IBC Exhibition and Conference in Amsterdam, a leading industry event. On that event, we will introduce further enhancement to our TV Anytime and on-demand solutions. We’ll also be showcasing a technology demonstration of 4K video encoded in HEVC format on later generation Ultra HD TV set from Samsung, as well as live connected TV and multi-screen services from customers in Belgium and Spain.

We believe that HEVC is a key new technology for our industry, which is expected to offer compression improvements up to 50%. This will allow our service provider customers to significantly decrease their network cost or to transmit high quality video over bandwidth limited network such as 4G. HEVC also paves the way for 4K Ultra HD TV delivery to the home. Our competitive advantage in the multi-screen video processing market has always been our industry leading technology, in which, we will continue to invest while cautiously managing our costs.

In closing, I would like to say that the progress we made in our financials result this quarter is a testament to our technology innovation in a growing market and the improved execution from our North American sales organization. Although, we believe there is more work to be done, the growth in our software license revenue is evidence of the market demand for converged software based solutions that enable a more personalized TV experience on any screen from the big screen TV in the living room to tablets and smartphones.

Let me now turn the call over to Erik Miller to discuss the quarter in more detail.

Erik Miller

Thank you, Julien. Good afternoon, everyone. Before I begin, please note that I will be discussing the financial results on a U.S. GAAP basis unless otherwise indicated. A reconciliation of non-GAAP to GAAP measures was included in our earnings release and can also be found in the Investor Relations section of envivio.com.

Let me now discuss the results for the second quarter of fiscal year 2014 in more detail. Revenue for the second quarter was $11.5 million, compared to $7.5 million in the prior quarter and $10.8 million in the second quarter of fiscal 2013. As Julien mentioned, the increase was principally from large orders we received from two leading U.S. cable operators resulting from our improvement in sales execution in North America.

In the second quarter, our revenue from the Americas was $6.2 million, as compared to $2.6 million in the prior quarter and $3.5 million in the second quarter of the prior year. Our revenue in EMEA in the second quarter was $3.7 million, compared to $3 million sequentially and $4.5 million in the prior year. Our revenue in Asia Pacific in the second quarter was $1.6 million, compared to $1.9 million sequentially and $2.7 million in the prior year.

Our gross margin percentage for the second quarter was 68.4%, compared to 63.3% in Q1 and 61.7% in Q2 of last year. Non-GAAP gross margin for these periods are the same as GAAP. We saw higher gross margins both sequentially and year-over-year primarily due to very large software revenues in North America. While we are pleased with the significant increase in gross margin this quarter, as we’ve mentioned before, we expect gross margin percentage to fluctuate based on product mix and geographic area of sales.

Non-GAAP operating expenses for the second quarter of fiscal 2014 were $9.7 million, compared to $9.1 million in Q1 and $10 million in the year ago period. Non GAAP R&D expenses for the quarter were $2.4 million, compared to $1.9 million in Q1 and $2 million in the year ago period. We increased our investments in product development this quarter in response to an increase in customer engagement and growing interest for a industry-leading software-based solutions.

Non GAAP sales and marketing expenses for the quarter were $4.8 million, compared to $5 million in the first quarter and $5.5 million in the year ago period. Non GAAP general and administrative expenses for the quarter were $2.5 million, compared to $2.1 million sequentially and flat with the year ago period. The sequential increase was primarily as a result of $118,000 increase in bad debt provision and costs associated with our proxy, audit and Annual Share Meeting held in July 2013.

Non GAAP operating loss was $1.8 million, compared to a loss of $4.3 million in Q1 and a loss of $3.3 million in the prior year quarter. Stock-based compensation expense in the second quarter was $549,000 compared to $519,000 in Q1 and $753,000 in the prior year quarter.

GAAP net loss for the second quarter was $2.5 million or a loss of $0.09 per share, compared to GAAP net loss of $4.7 million or loss of $0.18 per share in Q1 and GAAP net loss of $4.3 million or $0.16 per share in the second quarter of last year. The improvement in our net loss was from increased revenues and margin expansion in the quarter.

Non-GAAP net loss for the second quarter was $1.9 million or a loss of $0.07 per share, compared to non-GAAP net loss of $4.2 million in Q1 or a loss of $0.16 per share and non-GAAP net loss of $3.5 million or a loss of $0.13 per share in the second quarter of last year.

Moving on to the balance sheet, total assets as of the end of the second quarter were $70 million, compared to $67.7 million at the end of Q1 and $84.6 million through the end of the second quarter in the year-ago period. We ended the quarter with $53 million in cash, cash equivalents and short-term investments, as of – compared to $49.9 million at the end of the first quarter of 2014.

The sequential increase was due to the smaller operating loss in Q2 augmented by stronger collections of accounts receivable and the receipt of a tax credit from the French government related to research and development activities in the amount of $1.5 million. Our deferred revenue balance at quarter-end was $6.7 million, compared to $4.9 million in Q1 and $5.8 million a year ago.

Revenue from direct sales was 74% in the quarter compared to 34% in the prior quarter and 24% in the year ago quarter. The increase was primarily the result of the revenue received from two leading U.S. cable operators.

Our DSO for Q2 was 67 days compared to 108 days in Q1 and 113 days in the year ago period. The decrease in DSO reflects the shift in revenue to North America, which are shorter collection cycles. As mentioned before, we expect DSO to fluctuate based upon geographic and customer mix.

Total inventory at the end of the second quarter was $296,000, down from 445,000 – down from 545,000 in Q1 and up from 123,000 at the end of Q2 last year. The decrease in revenue sequentially – the decrease in inventory sequentially was a result of the use of inventory purchased in fiscal Q4 of last year. We ended the quarter with a total headcount of 156 compared to 163 in the prior quarter, and 160 in the prior year.

In closing, we are encouraged by our stronger revenue results this quarter and believe the changes we made to our North American sales team are beginning bear fruit. While we are confident in the improved performance of our sales team and product leadership in the growing multi-screen video processing market, we believe there is much more work to be done and we will continue to make efforts to improve our sales execution and control operating expenses.

With that, we will now take your questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) And our first question comes from the line of William Morrison with Oppenheimer & Company. Please go ahead.

William Morrison – Oppenheimer & Co. Inc.

Hi, Julien.

Julien Signès

Hello.

William Morrison – Oppenheimer & Co. Inc.

Hi, yeah. Just a couple of questions on the 2 MSOs, how far long are they on deployment and this go on for awhile or are they pretty much satisfied?

Julien Signès

Well, the 2 MSOs are, as we disclosed, one of them is an existing customer, one is a new customer. There is always ongoing project that is large account. So I think the reality with those accounts in general is that they’ve already done something, they continue to expand, so it should be the both. Clearly, the existing customer is an expansion from where we were, and the new customer is a new project, however, they had a prior – we replaced the prior technology that they were using after their lab testing. So in short, there is significant forward opportunity with both of these customers.

Erik Miller

but as with all large accounts, the timing and extent of those how they deploy is never certain. So things we will continue to be working in the accounts where to make sure that we are positioned properly in those accounts.

William Morrison – Oppenheimer & Co. Inc.

Right. Typically, the first initial deployment could be smaller and then ramp over time, is that the way to look at this or no?

Julien Signès

There is no definitive rule regarding that. So I’m not going to comment on that.

Operator

Thank you. And at this time, there are no further questions. I’d like to turn it back over to Alice Kousoum for the closing remarks.

Alice Kousoum

Thank you. Thank you everyone for joining us today on the call. We look forward to speaking with you again, next quarter.

Operator

Ladies and gentlemen, this does conclude the Envivio second quarter 2014 earnings conference call. We thank you for your participation. And at this time, you may now disconnect.

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