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Brightcove (NASDAQ:BCOV)

Q3 2013 Earnings Call

October 24, 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

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

Jennifer Swanson Lowe - Morgan Stanley, Research Division

Eric Lemus

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

Sameet Sinha - B. Riley Caris, Research Division

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

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

Operator

Greetings, and welcome to the Brightcove Third 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

Thank you. Good afternoon, and welcome to Brightcove's Third Quarter 2013 Earnings Call. Today, we'll be discussing results announced in our press release issued after the market closed tonight. With me on the call are David Mendels, Chief Executive Officer; and Chris Menard, Brightcove's Chief Financial Officer.

During today's 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 fourth quarter of 2013 and the full year 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 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 in 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 view of our financial results, market opportunity, as well as an update on our operations. Chris will then finish with additional details regarding our third quarter 2013 results, as well as our guidance for the fourth 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 third quarter 2013 earnings call. We're pleased to report results that were ahead of our expectations from both a revenue and profitability perspective. We generated revenue of $28.5 million, which represents growth of 29% on a year-over-year basis. In addition, we achieved non-GAAP operating profitability for the first time in our history, which is a quarter ahead of the target we set at the time of our IPO and another positive indication of the consistency of our financial performance.

During the third quarter, we continued to see customers looking for ways to harness the rapid growth in digital content across an increasingly complex variety of devices. Doing so effectively, through the use of our service, enables companies to drive greater consumer engagement and, ultimately, improve business performance. The level of customer interest in online video platforms was evident at this year's annual international broadcasting convention in Amsterdam, one of the premier industry conferences attended by more than 50,000 individuals from around the world. The key themes of this year's conference focused on the convergence of traditional broadcasting with the shift to online and mobile viewing, the rise of content aggregators and how the emergence of multiscreen television watching presents additional creative and technological complexity.

These are exactly the type of challenges that Brightcove is focused on solving for customers every day. The fact that we had more than 100 prescheduled meetings at the international broadcasting convention is a great indication of the mind share we're gaining in the market. Customers are increasingly recognizing that a flexible cloud-based online video platform is the most scalable and cost-effective way to deliver a great viewing experience to consumers.

We saw a significant interest in and continued success for our multiscreen engagement solution and we announced a great customer example in the quarter, with Viacom's release of a number of native apps that were built on Brightcove's platform. These native app video experiences, which are currently available for iOS and Xbox devices, with plans to expand to Android, were launched on some of Viacom's flagship properties like MTV, Nickelodeon and Comedy Central. They are terrific examples of how content creators and publishers can utilize our solution to remove the complexity of video publishing and distribution and to maximize the opportunity offered by multiscreen and TV Everywhere environment.

Looking at our third quarter performance, we had a solid quarter in our media verticals that included new customer wins with customers like magazine conglomerates, Mondadori in France and Centaur in the United Kingdom, traditional broadcasters like UTV in Northern Ireland and emerging video distribution platforms like vhx.tv and Golf Digest Online. While these customers serve different segments of the media market and are located around the world, what they have in common is a growing need for a cost-effective, highly scalable and user-friendly way to solve the digital media delivery challenges. Digital media represents by far the largest growth driver for today's traditional media company, and there's a significant opportunity for Brightcove to enable customers to deliver a higher quality video experience that is more cost effective with a faster time to market than building their own DIY platform.

A great example of the potential for new video distribution models is a deal we signed with vhx.tv, a self-serve video distribution system that enables content providers to market and sell their films directly to consumers. VHX is using Zencoder to empower independent artists to reach their audience directly without the burden of going through the time-consuming and cumbersome process of traditional distribution channel and represents an entirely new way for consumers to experience digital content. We also saw significant upsell activity in the media vertical during the quarter, with customers like Time Inc., Showtime, Rogers Media, Turner Broadcasting System U.K., ABS-CBN and allrecipes.com.

Allrecipes.com, one of the largest food portals on the Web, is a great customer success story for Brightcove. During the third quarter, we signed a $5 million upsell transaction that reflects a significant stream growth allrecipes.com is generating through the release of their Dinner Spinner app for Android and Windows. Mobile video now accounts for 25% of their overall web traffic and has been a huge source of overall growth, which is a trend playing out across numerous brands and content providers.

We had a solid quarter of deal activity among non-media customers that was highlighted by wins with highly recognizable brands like Green Mountain Coffee Roasters, IBM, the Coca Cola Export Group and sanofi-aventis Group. We also saw good upsell activity with existing customers like Citrix Online, Redbox, English Premier League and Home Depot USA.

During the quarter, we announced an exciting use case for Video Cloud by ExactTarget, which has launched a new video portal that includes a full library of video assets that can now be delivered across platforms and devices. An existing Video Cloud customer, ExactTarget has expanded the capability to include a fully branded customized video experience that includes social sharing features to facilitate greater engagement. In addition, ExactTarget utilized our new Video Cloud Live module to broadcast keynotes and breakout sessions from its recent connections user conference.

While still early, we did see encouraging customer interest in our Video Cloud Live module during its first full quarter of availability, with approximately 35 customer deals signed, including McGraw-Hill Financial and Newsday LLC. An exciting use case for Live is Time Inc. who has continued to expand its use of Brightcove's solution to support a number of new video initiatives across several of its media properties. This quarter, Time Inc. launched a new on-demand and live programming service on sportsillustrated.com using Brightcove and a live module, including the new live daily video show, SI Now, and new weekly live show Pro Football Now.

With Zencoder, we continue to see good customer interest for our cloud-based encoding solutions across a number of use cases. An exciting win during the third quarter was EVS, a global provider of live video production systems. EVS is partnering with Brightcove to power transcoding for its C-Cast solution, which is a suite of tools for broadcasters that allow for instant delivery of complementary content to a viewer's second screen during live events. This use case is an exciting example of what a multiscreen future can look like for content providers and opens up entirely new ways to engage with consumers and monetize content.

To summarize, our third quarter financial results were above our guidance, and we reached the important milestone of non-GAAP profitability for the first time. Our success with both new and existing customers is evidence of the significant impact that digital content is having across numerous industries throughout the world. As we look ahead, we believe that Brightcove is well positioned from a product and go-to-market perspective to benefit from the growth of digital content being delivered by the cloud.

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 on both the top and bottom line. For the third quarter, total revenue was $28.5 million, a 29% increase from $22.1 million in the third quarter of 2012 and ahead of our guidance of $26.8 million to $27.3 million.

In addition to delivering a solid operational performance, the majority of our revenue outperformance in the third quarter was driven by better-than-expected overage revenue and several hundred thousand dollars of professional services revenue that was recognized earlier than expected due to the timing of completion of several large services engagements. We are not anticipating overages to remain at the Q3 levels going forward and are mulling [ph] a return to the levels we have experienced in recent quarters.

Subscription support revenue of $26.5 million was up 23% year-over-year. Professional services and other revenue was $2 million.

Turning to revenue mix. Our premium offerings generated $25.9 million of total revenue, representing a 30% year-over-year increase, while our volume offering generated $2.6 million in revenue, a 26% increase from the third quarter of 2012.

On a geographic basis, we generated $17 million of revenue in North America for the quarter, which was up 23% year-over-year and represented 60% of our total revenue. Europe recorded $7.1 million, a 46% increase to the year-ago period and representing 24% of total revenue, while Japan and Asia-Pac generated $4.4 million of revenue for the quarter, up 33% year-over-year and representing 16% of total revenue.

From a vertical perspective, non-media customers represent 61% of our third quarter revenue and grew 25% on a year-over-year basis, while our media customers represent 39% of our revenue and grew 35% on a year-over-year basis. We continue to see a truly horizontal market opportunity and solid demand across a number of industries, though we continue to expect media will always be our largest market.

Turning to streams. As of September 30, our year-to-date average monthly video streams were 921 million, consistent with the second quarter and representing 39% growth on a year-over-year basis. As a reminder, video streams have not historically been a good predictor of revenue, and we do not expect them to be in the future.

Our recurring dollar retention rate was 91% for the quarter. This was within the reasonable range of variability as compared to our target of 93% to 94%, with the difference this quarter being a somewhat lower level of upsell activity in the quarter. We continue to feel very good about our recurring dollar retention rate, which is a testament to the value we are delivering to our customers.

Looking at our customer count, we ended the third quarter with 6,374 customers compared to 6,143 at the end of the third quarter of 2012. Breaking this down further, we ended the quarter with 1,759 premium customers, an increase of 53 from the end of the second quarter. We had 4,615 volume customers at the end of the quarter, which was down 65 over the previous quarter.

In the third quarter, we had approximately 40 Video Cloud volume customers upgrade to premium, including Aon Consulting and the Australian Olympic Committee, bringing us to over 100 upgrades year-to-date. 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 third quarter was $19.6 million, a 28% increase from a year ago, and a gross margin of 69%. Subscription and support revenue represented approximately 93% of our total revenue and had a 75% gross margin, while services revenue represented approximately 7% of our total revenue and a negative 8% gross margin. We expect additional gross margin expansion over time due to the inherent leverage in our ratable subscription model, and we are on track to be approximately breakeven in our services business during the fourth quarter.

Non-GAAP income from operations was $1.1 million in the third quarter, an improvement compared to a loss of $1.3 million in the third quarter of 2012 and better than our guidance of a non-GAAP operating loss of $900,000 to $1.2 million. The better-than-expected earnings were driven primarily by the top line outperformance in the quarter.

As David mentioned, achieving non-GAAP profitability is a milestone we've been targeting since our IPO, and we're pleased to have delivered it a quarter ahead of schedule. We believe this achievement demonstrates the scalability of our model and we expect to make continued steady progress to our target operating model over time.

Non-GAAP net income per share was $0.04 based on 30.1 million weighted average shares outstanding, which exceeded our guidance of a loss of $0.05 to $0.06 per share. This also compares to a per share loss of $0.05 on 27.5 million weighted average shares in the year-ago period.

On a GAAP basis, our gross profit was $19.3 million, operating loss was $1.3 million and our net loss per share was $0.04 based on 28.3 million weighted average shares outstanding.

Turning to the balance sheet. We ended the quarter with cash, cash equivalents and investments of $34.1 million compared to $30.5 million on June 30. DSO in the quarter were 65 days, which was in line with 64 days in the second quarter and better than 81 days in the year-ago period. Deferred revenue was $24.9 million, up 30% year-over-year.

From a cash flow perspective, we generated $4.8 million in cash from operations and invested $1.4 million in capital expenditures during the quarter, which equates to positive free cash flow of $3.4 million for the quarter and compares to a negative free cash flow of $1.4 million in the year-ago period. Our free cash flow result in the third quarter was better than our expectation and benefited from a strong cash collections performance and the timing of capital purchases. For the full year 2013, we expect to generate between $3 million and $4 million of free cash flow.

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

For the fourth quarter, we are targeting revenue in the range of $28 million to $28.5 million, which represents growth of 15% to 17%. We expect a professional services contribution in the fourth quarter of approximately $1.8 million as we continue to work through several meaningful engagements.

We've had a number of large professional services engagements in 2013, which we are not currently forecasting to repeat as we look into next year. We currently expect our professional services revenue run rate to come back in line with historical trends of between 4% and 5% of our total revenues.

We're targeting a non-GAAP operating income of $350,000 to $650,000. Based on 30.9 million shares outstanding, we expect non-GAAP net loss per share of $0 to $0.01. On a GAAP basis, and assuming 28.7 million shares outstanding, we are targeting a net loss per share of $0.09 to $0.10, which includes forecasted expenses for stock-based compensation expense of $1.6 million, amortization of intangibles of $430,000 and merger-related expenses of $180,000.

For the full year, we are raising our revenue guidance to a range of $108 million to $108.5 million and a non-GAAP operating loss of $350,000 to $650,000. We expect our non-GAAP net loss per share to be $0.05 to $0.06, based on 28.3 million shares outstanding. On a GAAP basis, we are now targeting a net loss per share of $0.40 to $0.41, which includes forecasted expenses for stock-based compensation expense of $6.4 million, merger-related expenses of $1.7 million and the amortization of intangibles of $1.7 million.

In conclusion, we are pleased to have reported another strong quarter with better-than-expected revenue and the achievements we made from a profitability perspective. We remain optimistic about Brightcove's leadership position in the OVT market and believe we are positioned to capitalize on this multibillion dollar market opportunity.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Tom Roderick of Stifel.

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

It's actually Gur Talpaz on for Tom. My first question, you recently announced a new Zencoder one with AOL. I know you had talked about it in the quarter, but I was hoping you could maybe give us some detail around that deal. And more specifically, what kind of -- what gives you confidence you can really handle the influx of streams that AOL represents?

David R. Mendels

Sure. Thank you. First of all, thank you for joining us here today, appreciate the question. So we didn't announce it in the press release because it's actually a prior quarter deal but we announced it from a PR perspective just recently. And so that's the difference there. It is a great deal. We're very excited about it. It is a Zencoder deal. What that means is that we're handling all of the transcoding of the AOL video files, and it's an extremely large number of files, of short form clips that they stream and distribute on their own properties, as well as on third-party properties. We are very well set up to handle that scale. This is being done by our Zencoder service. We operate at a very high scale and it's architected to be able to burst to the cloud -burst in the cloud, I should say, in order to be able to handle even larger volumes. And so we really -- it's -- in the big picture of things, it's a large number of files for a single account, but it's a small number of files for Brightcove. And we don't think it represents any risk to the scale or availability of our service. It's something that we're well suited to handle.

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

Got it. No, it's good color. AOL was, at one point, a very large Brightcove Video Cloud customer. It might be too early to tell or maybe I'm kind of overreaching here, but is there any chance, at this sort of deal, there's a chance to kind of expand beyond the Zencoder footprint within AOL?

David R. Mendels

We certainly have always maintained that relationship with AOL. We'd certainly like to do that. I certainly don't have anything to tell you here today. But our way of operating is we build relationships with customers, we stay in touch. We talk to different groups. An organization like AOL is large and complex. The reason that they had been a large Brightcove customer and ceased to be, is they bought a company called 5min, which now is the center of what is known as AOL Video. And that is the group that bought Zencoder. And so it's a bit of a circle here. But hopefully, over time, we'll be able to add more and more value to them and we'll be able to grow that business.

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

Got it. And then Chris, profitability here was a lot better than expected. Maybe you could provide a little bit more color around what drove that improvement across the board here.

Christopher Menard

Yes, it was really driven by the revenue overachievement. As we talked about in the canned remarks, we saw a pretty significant amount of incremental overage revenue in the quarter, and we also had some professional services revenue that we anticipated would be recognized in the fourth quarter come in the third quarter.

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

Got it. And one last question for me. Renewal rates, they were good but they did drop on a quarter-to-quarter basis. Are you still seeing some increased churn there from your lower-end customers that you kind of talked about on previous quarters?

Christopher Menard

Yes, that's a good question. Yes, the churn was always pretty consistent with what we talked about during the second quarter. In terms of the absolute number, at the 91%, we sold -- we had a little bit less in terms of upsell during the quarter and that dropped us a couple of points, but we're still pretty close to our historical averages.

Operator

The next question comes from Jennifer Lowe of Morgan Stanley.

Jennifer Swanson Lowe - Morgan Stanley, Research Division

Chris, I just wanted to ask, and I apologize for the background noise, but I just wanted to check, first, on the guidance. It basically looks like you're guiding for revenues flat to down quarter-over-quarter into Q4. Normally, we think about it being up quarter-over-quarter. To me, it looks like it's really just a function of the pull forward of those services revenue into Q3 and more conservative assumptions or more normal assumptions in overage versus what you saw in Q3. But I just wanted to touch on that. Is that the right way to look at the guidance? Or is there anything else that might be impactful in Q4 that would cause it to be flat to down versus what we saw in Q3?

Christopher Menard

No, I think you've got it absolutely right. We talked about a services revenue goal of about $1.8 million for the fourth quarter, so that's going to be down about $200k sequentially. And overage is going back to normal level, so somewhere in that $1.5 million range. Overage levels in the third quarter were just above $2 million.

Jennifer Swanson Lowe - Morgan Stanley, Research Division

Okay, great. And then the other thing I'd like to touch on is the -- when you listed off these logo wins in the quarter, I noticed a number of them were European companies. And clearly, Europe was one of the strongest performing areas for you in the quarter, whereas for a lot of companies, it's been more challenging in Europe. So I wanted to touch on, what exactly are you seeing in Europe? Is there anything different there that's causing that to maybe a bit stronger for you? Is this a function of the focus on the high-end media market or is it separate from that? How should we sort of think about the strength that you saw in Europe this quarter?

David R. Mendels

Sure. I think -- first of all, welcome, thank you. I think the challenges that we -- that many people are seeing in Europe, we are seeing in Southern Europe. And so we've historically had quite a good business in the southern parts of Europe, Spain and some of the other countries, and those are certainly more challenged regions and there's been strong macroeconomic challenges in those regions. Where we've seen more strength is in Northern Europe, the U.K. and the Nordics and a few other places as well. And so we don't look at Europe as a single monolith. I don't think there's any one story here. I think we have a good team that's been focused on the media sector in Europe. That is something we focused on a lot this year and we did see some good wins in that sector. We also saw some wins outside of that sector. And so there's no one story for Europe but it was a good quarter, and we have a good team and I think we're going to be able to keep building on that.

Operator

The next question is from Eric Lemus of Raymond James.

Eric Lemus

My first question, on Video Cloud Live, can you guys give us any early perspective on the financial impact of the Video Cloud Live product? As in, what type of contract value lift do you guys see with this product creating? And also, can you remind us how the pricing works on that versus the traditional Video Cloud product?

Christopher Menard

Sure. So first, in terms of how the pricing works, it's based on the number of live hours that someone purchases, and it's hours based on formats. So depending on the number of formats you need, it's multiple hours per live event. In terms of deal sizes, it's kind of all over the map. So we're seeing some customers make purchases that go coterminous with their existing Video Cloud accounts, so those are smaller in deal size just because it's not a full year. And we're seeing some people jump on board for a full 12 months. So in some scenarios, it's just a couple of thousand dollars up until probably $25,000 or $35,000 at the high end.

Eric Lemus

Okay, great, appreciate that. And then on the -- as far as sales productivity for the media-focused sales teams, where are you guys? Are they fully ramped yet? Or are they materially contributing to the business? Or is this particular sales team still ramping?

David R. Mendels

Well, I think, really, you have to think about a sales force as kind of an organic thing. So at any given point, there's people that are mature and have been here for some time. The Vice President who leads that sales organization for North America and Europe has been here for many years and a very seasoned salesperson. He's fully ramped. And he has on his team 2 individuals, one of whom is brand-new and one of whom isn't. So there's a mix within it. I'd say, overall, I feel like we're on track. We like the progress the team is making, and we're doing well. We have -- some of the rest are newer than the others. And so -- but when you average it together, you have a fairly well-ramped team.

Eric Lemus

Great. And you talked about having a little bit less upsell activity in the quarter. How do you guys see the upsell activity into the premium product? Is there still some low-hanging fruit still to catch? Or is there still a long runway to go? And where do you guys stand there?

Christopher Menard

Yes. I think we're still doing a great job of upselling overall. I think the average deal size is, as you know, for first-time customers comes in somewhere between $20,000, sometimes $25,000. And we continue to do a good job of upselling into the base. In fact, if you look at the results for last quarter, the average of license revenue per premium customer is up about 9 percentage points over the same period last year and now comes in at just over $55,000 per year.

Operator

The next question is from Brendan Barnicle of Pacific Crest Securities.

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

Dave, you'd mentioned the strength of the media business in Europe, but I was impressed with the overall acceleration you saw in the media business. I know you guys have been focused on it, but that 35% is a big uptick from where we've been earlier this year. Anything in particular that was going on there to attribute to that rapid acceleration?

David R. Mendels

Sure. Well, I think I'll just point you back to the previous conference call from earlier in the year when we talked about some of our wins. We talked about Network Ten, we talked about Yahoo!7, and those were fairly significant and there were some others as well. And the way our revenue works is you see that over time. And so we're starting to see those bigger deals kick in, and it's been a good year, building that team with something we signed before the beginning of the year, talked about the increased focus and we're still going. And there's also that group has generated a little bit more proserve and so some of those bigger proserve deals or consulting deals help contribute to that as well.

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

Great. And back at your user conference, you guys announced that you're going to split out the suite and start to sell off component pieces of it. I know when we talked about it last quarter, it was kind of still too early to see much benefit from it. Do you see that impact anything this quarter?

David R. Mendels

No, it's still early and because we haven't even done it yet. So give us a couple quarters, actually. In a sense, we've done it in that the Zencoder product is, by default, that's the way it was designed as a standalone a la carte service, a modular service. And obviously, we're selling that and so the impact were seeing from that relates to that. The Live module, on a small scale, is an example of that as well. But next year, you'll see more focus on that with our next-generation player service that we've talked a little bit about in terms of giving our customers roadmap visibility at our conference earlier this year, but that's not something that's going to shift in 2013.

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

And then lastly, any change on pricing on a competitive front?

David R. Mendels

Not material, no.

Operator

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

Sameet Sinha - B. Riley Caris, Research Division

Chris, as it relates to guidance, I know that you take historical retention rates into account while providing guidance. Now I remember that fourth quarter 2012, there was an anomalous retention rate because of a couple of clients have signed a little late. Did you normalize that when you provided guidance for this year's fourth quarter? Second question is in terms of sales team hiring. You probably had another 8 positions open as of last count. Where are you at? And in terms of productivity, is it tracking as per plan? Those are 2 questions and I have a follow-up.

Christopher Menard

Sure. The first question, in regards to the revenue retention rates, you're right. When we finished off the fourth quarter last year, we were a little bit lower than usual and that's because, if you remember, a couple of deals pushed out of December and into January, so I had that built into the guidance because those deals had actually already closed by the time we provided the guidance for the year in January. And so that's in our model and picked up at this point. In regards to the sales headcount, we are not tracking to be on the plan for the growth that we had anticipated at the start of the year. It's a very competitive hiring market, and we'll continue to look for good people, but we won't get all the way to the goals that we set at the beginning of the year.

Sameet Sinha - B. Riley Caris, Research Division

Okay. One final question. In terms of the overage that you saw, I mean, could you give us more details? Was it in the media segment specifically or was it non-media customers? And if you can clarify what sort of format or content before [ph], that will be helpful.

Christopher Menard

Yes. It was spread across both the media and non-media, and it wasn't like it was one customer that generated all the incremental overage. It was at least 2 handfuls that generated most of it. In the normal formats and types of overage that we normally see, it was just a bigger number than usual.

Operator

The next question is from Robert Breza of RBC Capital Markets.

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

I just wanted to clarify a few things. Chris, maybe if you could talk about how you think about profitability going forward. And then David, I know you did mention here in the Q&A a little bit about the components, how it relates to a la carte video pricing, but would love to have a little bit more color there.

Christopher Menard

Yes, so starting off with the profitability question. Obviously, we're excited with the third quarter results. It was great to get to the profitability goal a quarter before we had anticipated. And you can see that we're also guiding for profitability again in the fourth quarter. I think as we look into next year, the plan is not to go backwards and to remain profitable, but also to continue to invest for growth within sales and marketing and R&D. And so you've heard us talk over the last year or so about walking up towards the long-term model by a couple of hundred basis points per year, as long as we can find ways to generate incremental revenues. Based on our revenue retention rate, we do a good job of holding on to revenue and customers once we have them. And so it's going to be slow and steady as we go towards the long-term model.

David R. Mendels

As to your question on a la carte, let me just step back for a second and make sure it's clear what we're talking about. Historically, Brightcove's core product, Video Cloud, has been sold as an end-to-end suite, does everything from upload and ingest the video, to transcode the video, to play the video, to do the analytics on the video, to do the advertising integration, the metadata management, the content management, all within an integrated suite, and the product was priced with a platform fee and utilization fees on top of that around that suite. When we bought Zencoder a little over a year ago, Zencoder provided an a la carte service for transcoding in the cloud. And that pricing model is based on usage, the number of minutes or hours of content that you transcode and the number of times you transcode that into what format. And so that's sort of what we're talking about. What we've told the market and we've talked about this with our customers to sort of lay out our long-term vision is that, as we get into more complex and sophisticated use cases, we see more and more reasons why customers value getting things that are more modular or a la carte way that you can't sell the same thing, put a round peg in everyone's square hole. And so especially with the high end of media, we see customers that have very complex environments that you want to integrate into in different ways. And so we've talked about breaking up that suite and enabling more pieces of it to be consumed in a la carte manner much like Zencoder. So a big part of that is a sort of next-generation player service that lets people consume the player, even if they're not using our whole suite. That's something we've talked about delivering in 2014, and we're still on track to do that. It is in alpha. We've gotten really good feedback from people we've had a chance to get that to and get some feedback on it. So that's looking great. Another aspect of it is generating new add-on products that let us go back to a customer and sell them new things. So a year ago, we did that with our DRM product, which lets us offer Flash access and Wi-Fi and DRM to our customers to integrate into the way they built over video. And then this year, we did that with Video Cloud Live, which is a tool and a service for delivering live events in multiple formats so you can reach all the different devices that you need. So those are the pieces. I can jump into any follow-on question, but I just wanted to make sure I laid out the whole landscape of what that meant because I think some people on the call might not know the content.

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

No, I think that was very helpful, David. Just maybe -- just 2 seconds on the new analytics products. I know it just came available. Any early feedback or thoughts, that would be great.

David R. Mendels

Sure. The analytics module is part of that Video Cloud suite, so that's not a standalone a la carte product in terms of the way we price and package it today. So just to tie back to the previous conversation, it's a feature of the suite today as opposed to a standalone product. The feedback has been excellent. The performance is radically better than what we had before. It used to be that we had a 5- to 8-hour delay to get your reports. Now it's basically real time within one or a few seconds. You get data on who's viewing your videos and where your videos are being viewed and the like. The flexibility, the quality of the interaction, so you can get your data, and drill into your data, the availability of an API for people to create customer ports. So we've gotten lots of good feedback on what enables our customers to do and feel very positive about that. I think it's one of the things that is a key selling point for us vis-à-vis all our competitors.

Operator

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

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

I want to go back for a minute to the low-end churn you're seeing in the professional services business -- or professional business. Are we getting close to the end of that? Or do you think that goes on for a couple more quarters?

Christopher Menard

Yes. Steve, I don't think we know yet. I think we -- this is the second quarter in a row where we've seen some of that churn at the low end. We probably need to get through a couple more renewal cycles before we can tell you if this is a blip or a trend. We're doing everything we can to try to slow it down and retain more customers and upsell the existing ones, et cetera, but we don't have -- I can't tell you it's over yet.

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

And one of the other things you were doing was you formed what's called a hit squad to make sure that new customers onramped properly and had a good experience. Has that been successful in helping you retain new customers? Or is this churn part of that issue?

David R. Mendels

No, I feel good about that effort. It's something we started earlier this year, and one of our initiatives for the year was a team of people that could do both customer onboarding for our larger premium customers and health checks with some of our long-time customers who maybe, because they were long-term customers, weren't up to speed on best practices and weren't taking maximum advantage of the product. And so that's not something where we've touched every single customer, but we're working on how that scales over time. But we have seen good feedback from where we've been able to reach customers. Onboarding of our new premium customers this year has gone very well. We see a lot of customers getting successful quickly. So it's absolutely a part of a long-term set of strategies to continue to maintain and grow our retention rate, and we feel very good about it. I don't know if I can point to a change in our average yet, because it's still within 1 year, it's a little bit early. But I will say that anecdotally, I've talked to lots of accounts who say, "Wow, that was really helpful. Thank you. We got live faster than we expected." Or "Hey, we were having some challenges but now we understand how to get around that." We feel a lot better about how we're doing. So we're definitely getting that anecdotal feedback that it is helping us when it comes around to those renewals, but it's not set up yet where it's going to change the company metric. I don't know yet.

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

And on the overage issue again, is there -- as you said and analyzed the overages that you had this quarter, is there something in there that makes you think this is definitely not sustainable? Or is this your well-deserved conservatism that says it's an outlier and it can't continue and I ought to dial it back when I do guidance?

Christopher Menard

Yes, my guess is that it's an outlier. We've seen -- about once a year we hit close to this level and then it's come back down every time. And so I look at -- it's good.

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

Well, go ahead. Sorry, I didn't mean to cut you off.

Christopher Menard

We look at the customers who go into overages and try to gauge why they went into overages. Maybe it's a campaign that went -- was more successful than they thought it was going to be and things like that. So it's not a blind guess because we are analyzing the customers who are in overages and why they have occurred. And then we also have pretty good visibility for the folks who go into overages and do early renewals. So I would be surprised if we see this level of overage revenue again this quarter.

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

Okay. But I guess, we -- sometimes we investors get way too focused on the numbers. We shouldn't take from this guidance, "Oh, this means business is slowing down." Do you still think this business is a 20% plus growth business?

David R. Mendels

Well, we're not doing guidance here for 2014. That's not our goal today. We still feel, when we think big-term long picture, we said many times we think we're early. We think there's a very large opportunity and we're at the beginning of it. We think we're in a leadership position. And so without getting into changing or from -- giving you any guidance that we haven't already given you because we're not doing that today, we feel very good about the long-term opportunities of the business.

Operator

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

Sameet Sinha - B. Riley Caris, Research Division

A couple of questions. It seems like you're going after these large deals. Can you talk about the gross margin profile difference between -- as you get on some of these big logos on to your platform? And second question will be in terms of upsell, is there any specific seasonality during the year of upsells where -- which we can track? Or is it just kind of all over the place?

Christopher Menard

I will take the second question first. I think from an upsell perspective, a lot of upsells happen at the time of renewal, and our renewals are pretty evenly distributed across the year. And so there's no seasonality really in that portion of the business. In terms of the gross margin question, as it relates to the bigger deals, it depends a lot on the mix. Some of these big deals, they have their own CDN relationships and so we don't provide any of the CDN service. When that occurs, the margins are better on the license side, and some of these big deals have a big proserve component. And as you can see, we're making progress in professional services, but those margins are not as high as what we see on the license side. But overall, they're good margin deals.

Operator

We have no further questions in queue at this time. I would like to turn the floor back over to management for any additional remarks.

David R. Mendels

I wanted to thank everyone for joining us here today. I think we're excited about what we were able to achieve in the quarter, especially achieving profitability ahead of schedule. And I want to thank you for your continued engagement, so we look forward to talking to you again.

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.

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