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Executives

Douglas Sherk - Founder and Chief Executive Officer

Sherman L. Black - Chief Executive Officer, President and Director

James R. Stewart - Chief Financial Officer and Principal Accounting Officer

Analysts

Thomas Lewis

Gregory Allen Weaver - Invicta Capital Management, LLC

Qumu (RIMG) Q3 2013 Earnings Call October 23, 2013 4:30 PM ET

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Qumu Third Quarter 2013 Financial Results Conference Call. [Operator Instructions] At this time, I'd like to turn the conference over to Doug Sherk, with the EVC Group. Please go ahead, sir.

Douglas Sherk

Thank you, Vince, and good afternoon, everyone. After the close of the market today, Qumu issued a press release announcing its third quarter 2013 financial results. The release is available on the company's corporate website at www.qumu.com.

Before we get started, during the course of this conference call, the company will make forward-looking statements about its future plans, objectives, beliefs, expectations and prospects. For this purpose, any statements made today that are not statements of historical fact may be deemed to be forward-looking statements.

These forward-looking statements are not guarantees of future actions, outcomes, results or performance. By their nature, these forward-looking statements are subject to many risks and uncertainties that could cause actual results to differ materially from the results discussed in or implied by the forward-looking statement.

A discussion of the risks and uncertainties that affect Qumu's business is contained in the company's SEC filings, particularly under the heading Risk Factors and in the press release issued this afternoon. Copies of these documents are available online from the SEC or on the Qumu website.

These forward-looking statements are made only as of the date this conference call was initially held and the company assumes no obligation and does not intend to update these forward-looking statements after the date of this conference call, whether as a result of new information, future events, developments, changes in assumptions or otherwise.

In addition, to supplement the GAAP numbers, we have provided non-GAAP information that excludes severance expenses and the amortization of Qumu acquisition intangibles. We believe these non-GAAP numbers provide meaningful supplemental information and are helpful in assessing our historical and future business performance. A table reconciling the GAAP loss per share information to the non-GAAP information is included in our financial release.

And now I'd like to turn the call over to Sherman Black, President and CEO of Qumu.

Sherman L. Black

Thank you, Doug. Good afternoon, and thank you for joining us on our third quarter 2013 conference call. With me today is Jim Stewart, our Chief Financial Officer.

Today, we announced our third quarter financial results. Total revenues of $21 million were at the high end of our guidance, and we increased our cash position by $2 million. Software revenues were $4.4 million, a strong increase from a year ago, but not at a level that we believe reflects our potential and significantly growing pipeline.

I'd like to spend the next several minutes discussing some recent initiatives we undertook in the quarter to strengthen our position in the enterprise video content management market and the success we've seen to date. I'll also provide an update on our disc publishing business and the outlook. Jim will review our third quarter financial results and provide an outlook for the remainder of the year, then we'll open up the call for your questions.

As I mentioned, our Qumu software revenues demonstrated strong growth -- strong revenue growth year-over-year. Contracted commitments totaled $3.8 million, and the backlog was $10.7 million at the end of September. We signed 3 new large customers in the quarter. They included a global financial services provider, a Canadian division of an international consulting firm and a government entity in the Middle East. While these results demonstrate continued traction in our Software business, there were several important developments in the quarter that we believe will drive significantly stronger contract bookings growth beginning in Q4.

On September 16, we officially changed our corporate name to Qumu and launched a new corporate identity that is reflected in our outbound marketing content. As part of the effort, we have a new corporate website, qumu.com and a new stock symbol, QUMU. And to support its introduction, we did a comprehensive outreach to customers and media.

The Qumu name and identity reflects our commitment to the rapidly growing video content management market and optimism about its contribution to the company's future growth prospects. Video is becoming the new document, and corporations and other enterprises need video content production, management and secure delivery.

To showcase Qumu's software's differentiating capabilities, our new website features rich video content focused on use cases, customer insight, vertical markets and technology. We've had great reception to our Qumu branding initiative as demonstrated by the increase in our website traffic. The number of visits, unique visitors and page views are all up more than 80% in the second half of September compared with the first half.

We were also extremely excited to be recognized as a leader in the enterprise video content management market in a Magic Quadrant report very recently published by Gartner. Our ranking in the Gartner report is important for several reasons. First, the report validates the market potential of enterprise video content management. Second, it validates Qumu's differentiation in this fast-growing market. Specifically, our secure delivery technology, be it live broadcast, streaming on-demand or offline, the strength of our enterprise integrations, flexible deployment of our offerings and rich mobile apps.

Customer reaction has been very positive, resulting in increased traction with new accounts. The result has been a significant increase in our pipeline. This increase, along with the maturing of our sales team investments from earlier in the year, has led us to have high expectations for Q4. We expect our contracts in the quarter to significantly exceed the level of any one of the prior 3 quarters.

To support our anticipated growth, we have continued to expand our footprint. During the quarter, we hired 3 experienced sales reps from the industry who joined Qumu because they recognize our differentiation and the market opportunity. We also brought in a new Head of Marketing to help us expand our message.

We've made a great deal of progress in establishing Qumu as a leader in enterprise video content management. We see our momentum building in the marketplace, and we look forward to demonstrating our potential with a solidly improved contract bookings performance in Q4.

Turning now to disc publishing. Our revenue in Q3 was $16.7 million, a decrease of 8% from the prior year. Again, we saw strong revenue performance from consumables, particularly in the retail sector. Hardware sales remained under pressure as cloud-based, file-sharing products and mobile technologies continue to gain traction in the market.

As we've mentioned before, we have a significant opportunity with the federal government that has been approved, but long-delayed due primarily to budget issues. We believe these opportunities are still valid, but we're not in a position to predict anything about the timing of government actions in the near term.

Importantly, the third quarter reflected the cost-cutting efforts that we took in Q2 in our disc publishing business. This resulted in a decline in total operating expenses of over $1 million on both a year-over-year and quarter-over-quarter basis and enhanced the profitability of the disc publishing operation, which continues to generate significant cash.

Looking ahead, we are confident that demand for disc publishing will continue in several select markets including surveillance, media and entertainment, medical, total retail and financial services. We believe that our disc publishing infrastructure is now optimized to serve these markets effectively while generating positive cash flow from operations on a consistent basis.

As a result of the improved disc publishing profitability and stronger working capital management, our cash balance at the end of September increased $2 million from the end of the second quarter, a significant accomplishment for the company given the ongoing investments we continue to make in our software business.

In closing, we're very pleased with our progress. Social business and video adoption of the enterprise are creating a rapidly growing market, and our software has differentiated features, resulting in an expanding pipeline. With our recent restructuring of our disc publishing operation, we're now better positioned to continue to pursue opportunities and serve this market effectively while generating an ongoing cash flow from this business.

With that, I'd like to turn the call over to Jim.

James R. Stewart

Thanks, Sherman. I'll begin with a review of our P&L. Revenues in the third quarter totaled $21.1 million compared with $20.9 million in the third quarter last year, a 1% increase. This reflected strong growth in software revenues that was mostly offset by a decrease in disc publishing revenue.

Software revenues were $4.4 million, 59% above revenues in the third quarter of 2012, continuing the strong growth we saw in our first half results. Software contracted commitments were $3.8 million compared with $4.5 million last year. As Sherman stated earlier, we expect much stronger contracted commitments in this year's fourth quarter.

The backlog of software contracted commitments ended the third quarter at $10.7 million, down slightly from the end of last quarter. Disc publishing revenues totaled $16.7 million, a decrease of 8% from last year. These revenues included a significant consumables order from a retail customer in North America. Retail consumable orders are usually larger orders, and their timing is difficult to predict quarter-to-quarter. We'd expect this retail consumables demand to normalize over the next few quarters.

Third quarter consumable sales of printer ribbons, cartridges and optical media were up 13%. Driving this growth was a large retail consumables order as, mentioned. Service revenue, including parts, also increased 12% with higher maintenance contract attach rates, the main driver of this growth. These recurring revenues represented 60% of total company revenue in the third quarter compared with 54% in the prior year.

Hardware sales decreased 42% from the third quarter of 2012. Included in last year's revenues was a large refresh order from a significant financial services customer. Excluding that sale, hardware revenues were down 17%.

Disc publishing international sales were down 4% from the third quarter of 2012. These sales represented 27% of total sales in the recent third quarter compared with 29% in the third quarter of 2012.

Compared with last year's third quarter, currency changes have minimal impact on disc publishing revenues with positive euro changes offsetting negative currency changes in Japan. Third quarter 2013 sales in Europe for disc publishing were down 2% from last year, and hardware sales down by 11%, and recurring revenues up 1%. Disc publishing sales in Asia-Pacific were up 4% from last year with hardware sales increasing 15%, recurring revenues decreasing 3%.

Moving down the income statement. The gross margin was 47% for the third quarter of 2013 compared with 48% last year. Qumu's software gross margin in the third quarter was 53%. This was lower than last quarter's 69% and lower than expected due to our third quarter deal mix, which included more third-party products sold as part of our solution revenue. This led to a higher cost of sales, thus a lower margin. We expect this to normalize and for software gross margins to improve in the fourth quarter.

Disc publishing gross margin was 45%. Gross margin is lower than last year's 48% gross margin due to a lower value and mix of hardware revenue in this year's third quarter. As stated earlier, third quarter 2012 hardware revenues included a large financial services refresh order that did not recur this year.

Excluding the impact of third quarter 2012 nonrecurring charges, the impairment of goodwill and intangible assets, operating expenses in this year's third quarter were $11 million compared with $12.3 million in the third quarter 2012 and $12.3 million in the second quarter 2013. This improvement in OpEx compared to last year was a result of our cost-cutting efforts implemented last quarter in the disc publishing business, our reduction in disc publishing R&D spending and lower legal fees.

Third quarter disc publishing operating expenses totaled $5 million compared with $5.7 million in the second quarter to $6.4 million last year. Third quarter 2013 software operating expenses were $6 million compared with $6.6 million in the second quarter to $5.9 million last year.

Total company R&D expenses were $2.8 million in the quarter compared with $3 million in the third quarter of last year. Lower disc publishing R&D headcount and project spending were the drivers of this reduction.

Third quarter 2013, total company SG&A expenses were $8 million compared with $9.1 million a year ago. This reduction is primarily due to lower disc publishing sales and marketing costs.

Adding it all up, we generated a net loss of $1 million in the third quarter of 2013 compared with a loss of $42.8 million last year, which included 3 nonrecurring charges. These charges related to the write-off of goodwill, reduction in the fair market value of intangible assets and the establishment of a valuation allowance against our deferred tax assets.

Excluding these charges, the net loss in the third quarter of 2012 was $1.3 million. On a per share basis, excluding amortization charges, net loss in the third quarter was $0.08. This compares to the loss of $0.09 per share in the third quarter of last year on a comparable non-GAAP basis.

Turning now to a brief overview of our year-to-date results. Total company revenues were up 5% to $61.8 million compared with the prior year. Software revenues have increased significantly to $13.6 million, up 146% compared to last year. Third quarter year-to-date software contracted commitments totaled $11.6 million, an increase of about 5% from last year.

Disc publishing revenues have declined 9% to $48.2 million with a significant decline in hardware revenue, partially offset by an increase in recurring consumables and service revenues. The decline in hardware revenue is largely driven by the comparison against 2 large refresh orders in 2012, one in retail photo and another in financial services that did not recur in 2013. Gross margin was 48% for the 2013 period versus 48% last year. On a non-GAAP basis, excluding amortization, severance expenses and one-time charges, the loss per share was $0.61 through the 9 months of 2013 compared with a loss of $0.46 last year.

Now turning to our cash position. Cash and marketable securities totaled $48.4 million at September 30, 2013, compared with $46.1 million at the end of June. During the third quarter, we generated approximately $2.5 million in cash from operations compared with a cash usage of $1.9 million in the second quarter. This increase in positive cash generated -- cash generation reflected improved profitability from our disc publishing business and stronger working capital management, including lower receivables and inventory levels. Together, receivables and inventory were down by $1.2 million at September 30, compared with the level at the end of June.

Capital expenditures totaled $300,000 in the quarter. Year-to-date, cash used in operations was approximately $400,000 with capital expenditures of $873,000.

We did not buy back any shares of Qumu's stock during the third quarter. The company has approximately 778,000 shares remaining on its repurchase authorization and may repurchase shares from time to time during the year, depending on market conditions.

Turning now to our outlook on revenues for the fourth quarter and full year 2013. We expect revenues for the fourth quarter to be between $18 million and $20 million. Our annual revenue outlook remains unchanged. On a consolidated basis, we expect annual 2013 revenues to grow compared to 2012. We continue to expect software revenues in 2013 to grow at a rate in excess of 70% compared with 2012. This growth in software revenues will be partially offset by a decline in disc publishing revenues. For the year, we expect cash used in operations to remain in the low-single digit millions.

That concludes our formal remarks. Now, Sherman and I will be happy to answer any questions. Operator, could you please open up the line for Q&A?

Question-and-Answer Session

Operator

[Operator Instructions].

And our first question is from the line of Jeff Van Rhee with Craig-Hallum.

Unknown Analyst

This is Ryan on for Jeff right now. We just had a couple of questions about a couple of things. Now you said you had 3 new customers, the financial service firm, the Middle East government and I'm blanking on the third one, oh, the consulting firm. These 3 new customers, are they cloud or are they premise customers? Can you speak about them a little bit?

Sherman L. Black

Yes, they were all 3 premise-based customers, and those were the significant deals during the quarter.

Unknown Analyst

Good. And then now for your Q4 guidance, you're guiding the $18 million to $20 million. Was that down sequentially year-over-year? Can you speak about that?

Sherman L. Black

I think, yes, we're very, very confident in the level of contracts that we have in front of us and the pipeline that's going to close in Q4. We're excited about the outlook for that quarter. I think the question is how much of that revenue will be recognized during the Q4 time frame.

James R. Stewart

Yes, there's a number of these deals in the pipeline that are cloud deals and term subscription type deals. So the revenue recognition on those will be over time, not necessarily in the quarter.

Unknown Analyst

Great. And then I guess can you just touch on this pipeline you're referring to with the strong confident deals you have in there and just provide a little color about them?

Sherman L. Black

Yes, we've seen our pipeline grow dramatically throughout the entire year. We've seen it grow significantly since the July time frame as well, given the added marketing efforts that we've had, as well as I think just putting the feet on the street and getting the wins we've had. Our customers are doing a good job representing us and actually helping us sell our product as well. And on top of that, I think the whole recognition in the marketplace as people bring more and more video assets online, a lot of the homegrown systems or a lot of the one-off mechanisms that they were using to manage video content, they're just not making it. And customers really want to use video as a big part of their social business strategy. So the market's happening, as well as I think that the investments we've made in the last year are starting to -- starting really to accelerate and catch up.

Unknown Analyst

I guess if you had to put an average value on the size of the deals in your pipeline, where would you put that? What would you...

Sherman L. Black

Average deal size? Yes, I don't think -- we're not prepared to go into that level of detail here.

Operator

Our next question comes from the line of Steve Ryan [ph] with Sabre Capital.

Unknown Analyst

Just want to first commend you on the cost controls that you had implemented. Very, very happy and excited to see some of the revenue that you guys have been generating fall to the bottom line. A quick question on just the margin at Qumu dipping at 53, and you forecasting that it will rebound from there. Should we look at something more in line with the first half of the year?

Sherman L. Black

Yes. I think you need to look at the margin over a few quarters, and that's probably a reasonable way to look at how that's going to normalize out for the future.

Unknown Analyst

Okay, perfect. And then it seemed in the press release that you are really excited, you won a few deals for the software side of the business and now showing through in the contracts committed, the deals you have in the pipeline. Are you guys -- it seems like, though, on the forecast maintaining just 70% year-over-year growth for the year that you're forecasting Qumu to remain kind of in the mid-$4 million range. Is that just policy of being conservative? And/or is 2014 going to be a year that some of these commitments are going to really flow through?

Sherman L. Black

It really relates to how we answered the question previously in terms of -- we're very optimistic about our contracted commitments and bookings here in the fourth quarter. But how that translates into recognized revenue is a little bit uncertain, given the kinds of deals that we're doing or more of the deals being term subscription deals or cloud deals. So that's why we're being a little cautious in that regard.

Operator

Our next question is from the line of Thomas Lewis with High Road Value.

Thomas Lewis

Just one question for me. You referenced this business of your customers doing a good job of helping sell your software. Should we understand that as just that good old-fashioned, word-of-mouth that you get when you do a good job at something for a while? Or is that something that you can actively foster? And if so, can you explain how you do that?

Sherman L. Black

I think it is word-of-mouth, but we are indeed trying to actively foster. We just, in fact, had a significant customer summit that brought many of our customers together where they discussed use cases. They talked about how they're using our products. They -- which by the way, results in several things for us. It gives us fantastic insight to improvements we want to make to our products, but it also gives the other customers ideas on how they can get more value out of the existing platform and possibly lead to expansion opportunities. And so that's a great thing. The other thing that we've done is I believe the content that we have on our new website is really -- it's our customers talking about how they're using our products. It's extremely authentic. I think it's very compelling. Some very strong endorsements from some very sophisticated users, and I think that's been helping, as well as just the word-of-mouth. And it's a very tight community, many of the customers that we're selling into, there's really 2 major communities that we work with. One is the Corporate Communications side. The other one is on the IT side, and there's probably a third community that's developing very rapidly. And that's just the whole social collaboration community. And so among those 3 circles, there's a lot of overlap, and we're starting to feel a lot of momentum and getting referrals through those methods.

Operator

Your next question's from the line of Greg Weaver with Invicta.

Gregory Allen Weaver - Invicta Capital Management, LLC

What portion of that $10.7 million in backlog could possibly be recognized in Q4?

James R. Stewart

We don't really talk about the backlog and how that's going to get recognized over time. I think you should assume that the majority of that is going to be recognized really over the next 12-month time frame, but it really extends out even beyond that. So, Greg, I can't answer that question directly. But it'll certainly -- there will be a nice chunk of that backlog that does get recognized.

Gregory Allen Weaver - Invicta Capital Management, LLC

Okay. How about independent of the type of deals that you land in Q4? So just in terms of bookings, do you think they'll get the full year book-to-bill above 1?

James R. Stewart

The full year book-to-bill above 1. Yes, I do.

Sherman L. Black

Yes.

Gregory Allen Weaver - Invicta Capital Management, LLC

Okay. That helps. You don't know what the bill is yet, but I can take a stab at it. How about on -- you mentioned about customers helping you out to sell the product. How about on the partner side of things? Do you see any leverage there, anything you could talk about in terms of helping you sell, or integration?

Sherman L. Black

Yes, I mean, we have an opportunity that we're in the process of closing. I thought we were actually going to close it last quarter that this is a referral that comes from a partner, non-compensated referral I should say and it's one of our cloud deals. We're starting to work with some major IT and integration companies for their internal use of our product, and I believe that's also going to help play into some future partnerships there as well.

Gregory Allen Weaver - Invicta Capital Management, LLC

Okay, great. And I guess just lastly, as you mentioned cloud there, any further color now that you had the product in the marketplace a little bit longer in terms of how that's going, sales cycle, compression hopefully, et cetera?

Sherman L. Black

Yes, I'll be honest with you. I was disappointed we didn't close the number of deals this quarter, I wanted to close. I think we had -- as we were preparing to launch the product back in Q2, we had a pipeline of opportunities. And I think we blew those out. We did not get the closures that I wanted to get, but I will tell you that as we talk about the optimism around the Q4 pipeline, a big portion of that is -- or I should say a good portion of that is cloud, and you'll see a very different story in Q4. Those deals are well along in the process, and so I'm speaking with quite a bit of confidence on that. Greg, the other thing I want to just go back to the partner referrals. We hired an individual to help us come in and do business development with key partners, and that individual started back, I believe in the July time frame. So he's had about 4 months on the ground, starting to make a significant amount of progress in terms of really getting us the mind share with the partners that can help provide some flywheel effect for us in the 2014 time frame. We've also made a significant hire in Europe that will also I believe assist us with business development, again industry professional with a lot of experience, very well connected in that area and I think again will play a key role in our 2014 growth plans.

Gregory Allen Weaver - Invicta Capital Management, LLC

Great. And one more I guess. Could you give us a sense of the number of quota-carrying sales folks you have and how about what you started the year with and where we are today and maybe where you -- your hiring thoughts there?

Sherman L. Black

I've actually got a chart. I don't have it off the top of my head, but I do have -- what I can tell you we're up in the U.S.

James R. Stewart

I think it's right around 20 globally now.

Sherman L. Black

20 globally, and I guess there's been 3 or 4 of those put in the U.S. this year. And those are large quota-type carrying. We've also started expanding at a secondary level of sales rep working some of the smaller opportunities, trying to get a much more base hits. And then in the case of EMEA, we're also expanding there. We've got, I guess, a couple on the ground. We're putting 2 more on the ground. So we'll be up 100% in EMEA going full speed into '14 along with business development resources and sales engineering and services.

Operator

[Operator Instructions].

Gentlemen, I'm showing no further questions at this time. I'll turn the conference back over to you for any closing remarks.

Sherman L. Black

All right. Well, thanks again, everyone, for joining us today. I hope we've given you a sense of the excitement that we have about the outlook for Qumu in the months ahead. I know there may be additional questions that Jim and I are certainly available to answer those. We look forward to updating you on our next quarterly conference call in February. Thank you.

Operator

Thank you, sir. Ladies and gentlemen, this does conclude the Qumu third quarter 2013 financial results conference call. Thank you very much for your participation. You may now disconnect.

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