Envivio, Inc. (NASDAQ:ENVI)
F3Q 2014 Earnings Call
December 2, 2013, 5:00 PM ET
Alice Kousoum – Investor Relations
Julien Signès – President, CEO and Co-Founder
Erik Miller – Chief Financial Officer
Scott Butler - Catalyst Research
Mike Lin - Stifel Nicolaus
Good day, ladies and gentlemen, thank you for standing by. Welcome to the Envivio Third 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)
I would now like to turn the conference over to Alice Kousoum, Investor Relations. Please go ahead, ma’am.
Thank you, Colton. Good afternoon and welcome to Envivio’s third 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 a discussion of the financial results from Erik. This afternoon, Envivio issued a press release announcing its third quarter financial results, which is available on the company’s website at envivio.com. The 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.
During the course of today’s call, Julien and Erik will make projections, estimates and other forward-looking statements, including statements about Envivio’s overall business outlook, anticipated future financial and operating results such as revenue, gross margin and operating expenses and operational and strategic plans. We caution you that the statements are predictions based on management’s current expectations or beliefs and that actual events or results may differ materially. In addition to the risks and uncertainties described on today’s call, other factors that may affect our business are described in the safe harbor statements and in earnings release and other documents we have filed with the Securities and Exchange Commission which can be found on the SEC’s website at sec.gov.
Envivio undertakes no obligation to confirm, update or revise the financial forecasts for next quarter or any other forward-looking information contained in the call. 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 in the earnings release on Envivio’s website.
And now, I’d like to introduce Julien Signès.
Thank you, Alice. Joining me on today’s call is Erik Miller, Envivio’s Chief Financial Officer. We are encouraged with our results this quarter with revenue of $11.7 million, up from $11.5 million in the previous quarter and more notably up 62% year-over-year. Our strong year-over-year revenue growth was driven by continued improvements in the performance of our sales organization and in particular ongoing momentum in the U.S. with large carriers.
We continue to see increased customer engagements and a large funnel of potential opportunities going forward. We have significant leadership and momentum in multiscreen encoding with Q3 revenue for our Muse and 4Caster products totaling $6.6 million, up 60% from the same period last year. We believe we are showing very strong momentum in the market, including many service expansions at key tier 1 customers.
We are also encouraged by growth of our Halo product sales and customer interest with Q3 results nearly double the results of the same period last year. This quarter, we deployed Halo at another tier 1 U.S. operator as well as with several existing European customers. We also continued to see growing demand for our Halo product thanks to versatility and advanced capabilities such as just-in-time packaging, ad insertion and personalization which are important as operator network architectures evolve. We also had solid gross margin in the quarter of 65.2% affecting an increase in software license orders from tier 1 customers.
Now turning to some of our customer highlights for the quarter. In Europe, Numericable, the leading cable operator in France, deployed our Muse encoders on the 4Caster G4 Intel-based appliance for their new triple-play service targeting traditional TV sets and mobile devices. In addition to our ability to deliver best in class video quality for all screens, the scalability and quick integration of our software based headend solutions were key factors in being chosen for the deployment.
BSkyB, the largest pay TV service provider in the UK and Ireland, continues to expand their successful OTT services with additional Envivio multiscreen solutions. In Latin America, we had several notable wins, including two new cable customers who selected Envivio for expansions of their existing traditional pay TV services. We also continue to focus on sales execution in this region hiring a new sales director based in Brazil and working with the major media sales agency to facilitate sales efforts with our partners and customers in Latin America.
We continue to receive orders from tier 1 North American customers, including Verizon through our value-added reseller IncrediTek which contributed 14.7% of revenue for the company. Also, a tier 1 U.S. cable customer had placed a significant volume of orders in Q2, continued expanding this quarter with orders representing 12.8% of revenue.
Turning to our products, during the third quarter we announced the integration between our Halo network media processor and Google Widevine digital rights management. By leveraging MPEG-DASH and common encryption standards, this integration allows operators seamlessly deliver high quality video services to the full range of Android and Chrome devices.
Envivio has been a pioneer in multi-screen video delivery across all formats and we continue to fully support all major operating systems, including iOS and Android. We continue to invest in enhancing our solutions and recently announced the integration of advanced features in multi-screen content protection. This includes Microsoft PlayReady server technology and Civolution’s NexGuard watermarking. Microsoft and Envivio are longstanding industry partners and have now teamed up to integrate Microsoft PlayReady digital rights management for Android and iOS with Envivio Halo network media processors. The integration with Civolution’s NexGuard watermarking technology for live internet or over-the-top services allows service providers to easily identify streaming sessions without impacting the viewers’ experience and to identify the source of possible content theft.
We are also pleased that our Halo Experience Server and Muse On-Demand received outstanding scores in Broadband Technology Report’s 2013 Diamond Technology Reviews. The judges awarding a top score to the Halo Experience Server noting that it can enable new multi-screen applications and content personalization capability. Muse On-Demand was highlighted as a solid encoding platform with accommodation for 4K and HEVC. Overall we are encouraged by gradual improvement in customer spending. In particular, trends such as 4K and HEVC are showing early promise.
We are seeing growing interest among customers in converged solutions that support the full range of screens from HDTV set in the home to tablet and smartphone. Leading tier 1 operators are also embracing a more software and cloud-based approach to video processing, which is aligned with our software strategy.
Beyond video processing, we are observing an increased need for global optimization of video delivery in the operator network. Halo is playing an increasing role in meeting this need. As you know, we are subject to risks associated with the spending patterns of our target customers and in particular large service providers but we are cautiously optimistic with what we are experiencing and seeing in the market. Our competitive advantage in the multi-screen video processing market has always been our industry-leading technology and we continue to invest while cautiously managing our costs. We believe that by making the right investments to strengthen our technology leadership and continuing to execute on our business plan, we can return to profitability.
Let me now turn the call over to Erik Miller to discuss the quarter in more detail.
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 with our earnings release and can also be found on the Investor Relations section of envivio.com.
Let me now discuss the results for the third quarter of fiscal year 2014 in more detail. Revenue for the third quarter was $11.7 million compared to $11.5 million in the prior quarter and $7.2 million in the third quarter of fiscal 2013. The increase, both sequentially and year-over-year, was primarily a result of the ongoing improvement in our sales team performance, growing market acceptance of software-based solutions for multi-screen video processing and improving market demand.
In the third quarter, our revenue from the Americas was $4.6 million as compared to $6.2 million in the prior quarter and $1.3 million in the third quarter of the prior year. The significant year-over-year increase was principally due to our efforts to improve sales coverage and execution in the Americas as previously discussed. The sequential decrease was the result of significantly large orders we received last quarter from two leading U.S. cable operators, again as a result of our improvement in sales execution in North America.
Our revenue in EMEA for the third quarter was $4 million compared to $3.7 million sequentially and $3.5 million in the prior year.
Our revenue in Asia-Pacific in the third quarter was $3.1 million compared to $1.6 million sequentially and $2.4 million in the prior year. The increase sequentially was due principally to an existing tier 1 customer that replaced their legacy hardware based system with a converged software-based Envivio solution.
Our gross margin percentage for the third quarter was 65.2% compared to 68.5% in Q2 and 64.7% from Q3 of last year. Non-GAAP gross margins for this period are the same as GAAP. We saw a decrease in gross margin sequentially due to very large software revenues in North America last quarter. As we mentioned before, we expect gross margin percentage to fluctuate based on product mix and geographic area of sale.
Non-GAAP operating expenses for the third quarter of 2014 were $9.8 million compared to $9.7 million in Q2 and $9.5 million in the year ago period. Non-GAAP R&D expenses for the quarter were $2.5 million compared to $2.4 million in Q2 and $2 million in the year ago period. Non-GAAP sales and marketing expenses for the quarter were $4.9 million compared to $4.8 million sequentially and $5 million in the year ago period.
Non-GAAP general and administrative expenses for the quarter were $2.5 million, flat sequentially and when compared to $2.4 million in the year ago period. Non-GAAP operating loss was $2.2 million compared to a loss of $1.8 million in Q2 and a loss of $4.8 million in the prior year quarter. The sequential increase in operating loss was due principally to lower gross margins and a slight increase in operating expenses. The year-over-year improvement was from increased revenues and margin expansion in the quarter.
Stock-based compensation expense for the third quarter was $631,000 compared to $549,000 in Q2 and $668,000 in the prior year quarter. GAAP net loss for the third quarter was $2.9 million or a loss of $0.11 per share compared to GAAP net loss of $2.5 million or a loss of $0.09 per share in Q2 and a GAAP net loss of $5.6 million or a loss of $0.21 per share in the third quarter of last year.
Non-GAAP net loss for the third quarter was $2.3 million or a loss of $0.08 per share compared with non-GAAP net loss of $1.9 million in Q2 or a loss of $0.07 per share and non-GAAP net loss of $4.9 million or a loss of $0.18 per share in the third quarter of last year.
Moving now to the balance sheet. Total assets at the end of the third quarter were $68.6 million compared to $70 million at the end of Q2 and $77.5 million at the end of the third quarter in the year ago period. We ended the quarter with $49.9 million in cash, cash equivalents compared to $53 million in cash, cash equivalents and short-term investments at the end of the second quarter of 2014. The sequential decrease was due to higher operating loss in Q3, the timing of shipments in the quarter and the annual receipt of the research and development tax credit from the French government in the second quarter.
Our deferred revenue balance at quarter end was $7 million compared to $6.7 million in Q2 and $5.5 million a year ago. The year-over-year increase reflects an increase in our sales of service-level agreements and the commercial terms on some order shipped in the quarter.
Revenue from direct sales was 54% for the quarter compared to 74% in the prior quarter and 46% in the year ago quarter. The sequential decrease was primarily the result of large orders we received from two U.S. cable operators in the prior quarter.
Our DSO for Q3 was 80 days compared to 67 days in Q2 and 105 days in the year ago period. As we mentioned before, we expect DSO to fluctuate based on geographic and customer mix.
Total inventory at the end of the quarter was $412,000, up from $296,000 in Q2 and up from $284,000 in Q3 last year. We ended the quarter with a total headcount of 156, flat with the prior quarter and down from 161 in the prior year.
To recap, this quarter’s financial results demonstrate positive trends in our business as a result of the internal changes we made this year in our sales force and cost structure as well as the positive developments that are happening in the multi-screen video processing market. We are encouraged by the progress made so far in improving our sales performance and the increasing engagement with service provider customers around the world. We remain cautious about our customers’ spending patterns which can change from period to period.
With that said, we are pleased to see growing market demand and in general for multi-screen and personalized TV services and the adoption of our software-based multi-screen solutions. While we are very excited by our progress, we remain focused on our efforts to further improve sales execution and control operating expenses.
With that, we will now take your questions.
(Operator Instructions) Our first question comes from the line of Scott Butler with Catalyst Research.
Scott Butler - Catalyst Research
It’s good to see some sequential growth. You talked a little bit about professional services and the revenue being up quarter to quarter. I wonder if you can remind us what that consists of and is that perhaps a harbinger of future business or an early sign of business, and if you could talk about your Halo production deployments as well to date?
Sure. So in general we made conscious efforts in service on two fronts. One is the renewal and expansion of our SLA. As our customers are deploying more and more commercial services based on our solutions, we obviously want to increase our support capabilities and increase our revenue from those recurring revenue streams of the SLA. So that is, the renewal is up and we have been able to sign more and more customers on those programs.
The second component of services is what we call professional services which typically range from installation to commissioning to some design – some network designs that we do. And we also are consciously increasing that as we more and more entrench in complex video solution for new services delivery. So that’s the answer. We’ve got the percentages and maybe Erik, you can share those.
Yes, was 19.8% of revenue or $2.3 million was service and support revenues in the current quarter, versus $2.1 million or 18% in the previous year and $1.6 million or 22% in the previous year versus $2.1 million, sorry, in the sequential quarter.
And then concerning the Halo, we think it’s a natural tendency of our customers who have deployed the Muse product, which are now launching these services trying to scale those services, increase flexibility by having a network DVR functionality as well as a more optimized delivery monetization with ad insertion. We had one of our first deployments with that functionality this quarter. And so we see more adoption as a second step. So a lot of our customers that deploy Muse are now moving on to the Halo platform.
Scott Butler - Catalyst Research
Very interesting. And can you talk about kind of evaluation activity of Halo? I know that you’d seen some in the prior quarters. Could you give us some color on that at all?
Yes. So we continue to see quite a bit of activity. I would say, it’s across the board from all our prior – in particular the major customers because Halo is typically meant for large networks. So all the tier 1 customers across-the-board have ongoing evaluations. So this is still a relatively small percentage of our revenue this quarter but we certainly see progress as we reported and continued progress in evaluations and potential.
Scott Butler - Catalyst Research
One last question, I’ll jump back in the queue. There has been a lot of talk, Time Warner Cable and industry consolidation and that kind of stuff. Could you give us at least kind of the company’s view of how industry consolidation impacts your ability to sell your products and what is the environment right now that you are seeing? Can you give us any --?
We haven’t seen really effects of that at a CapEx spending level, if anything we reported some cautiously optimistic spending trends at all the major customers, and we’ve seen some of that this year compared to prior year. So we haven’t seen those latest news. We think that the industry is definitely at a pivotal moment of changes that we described with this TV without boundary concept. And we think that the industry is going to continue to change for the most part the major changes which are linked to these over-the-top services and linked to more competition from between online and traditional cable services, the multi-device, are all basically positive for our products in the sense that they are linked to - the solution we provide are linked to this industry’s trend at a high level. And so we we’re not seeing any cautious – caution in spending linked to those specific movement you mentioned and we are seeing overall improvement in the adoption of those services.
Scott Butler - Catalyst Research
Great, well terrific, I appreciate. I’ll jump back in the queue. Congratulations on the sequential growth and the strong rebound; it’s good to see.
(Operator Instructions) And our next question comes from the line of Michael Lin with Stifel Nicolaus.
Mike Lin - Stifel Nicolaus
Hi. I just wanted to follow up about the visibility of orders or just the general environment for your sales pipeline. I mean obviously this is the second quarter of positive growth. I am trying to get a feel for what the environment is like and based on what you're seeing, have you sort of reached the bottom of the cycle that you have seen since 2012 into first half of 2013?
Sure. Well, we made a concerted effort not to guide to specific numbers for the following quarters. However we also have indicated a continued improvement in our global pipeline and potential order opportunities going forward. So we continue to be positive about that. So we certainly think that and we are very focused like we mentioned to return to profitability. Today profitability is still around $15 million to $16 million revenue per quarter. So we are working towards those goals. We certainly see a gradual improvement in some of the factors we talked about in the last 12 months, including our own execution efforts. We are continuing to improve and improve our coverage. We have seen the results of that and we continue to expect improvements from improved execution on the sales side.
On the market side, we see not a radical but certainly gradual improvements in spending and maturity of those services, our customers, you see customers like BSkyB and Verizon and others that have purchased every quarter a significant amounts linked to their increased activity. So we’re cautiously optimistic about those spending. Obviously we remain prudent and very focused on execution.
Thank you. And our next question comes from the line of Scott Butler with Catalyst Research.
Scott Butler - Catalyst Research
I just wanted to kind of follow up. You’d announced some partnerships or relationships I guess it would be best terms with the Broadcom and some other kind of industry heavyweights in the past. And I was wondering if you could update us on the status of those and maybe give us a sense of what you folks anticipate in the future.
Sure. Well, we are focused, I would say, on three major fronts as far as partnerships. One is the one you mentioned with Broadcom and other decoder companies, shipment designs and others, who are making the next generation decoding chipset either for mobile or set-top box platforms, this is important in particular as it pertains to the HEVC and new codec that’s being deployed and the reminder, this is a new compression algorithm that promises anywhere from 30% to 50% improvement over current technology. So a very significant network efficiency gain that we think will trigger some further business starting next year.
So we are actually working on those programs. We are also working – there were several announcements this year on security, because one of the obvious inertia factor in our industry is – concerns around security for online services as well as linked to payments and monetization. So security is a very important focus as well for us and we made several announcements this quarter with Google, Civolution, with Microsoft. And lastly, the technology platforms remain very important, so this is Microsoft, Apple, Adobe, these are the main ecosystems for delivery especially on the mobile devices and PC platforms. So we are continuing to invest in those relationships as well. So these are three major industry ecosystem focus on top of our traditional distribution partners, which we always have a very tight relationship with.
Scott Butler - Catalyst Research
Just kind of as a follow-up is this kind of an overarching theme. It just seems like there has been a lot of discussion about TV Everywhere, I mean have been more conceptual and you’d seen some one-off adoption at least talking domestically here in the U.S. But now we’ve seen Charter Communications has rolled out a TV Everywhere platform, Liberty Cable, there has been a number of deployments and additional deployments. Seems like there is a lot of pan action to use that crude term, in the industry right now. Could you kind of help us put that into perspective on what you guys are seeing on your side as far as request for proposal and business flow? I know you did comment that the pipeline is continuing to grow but –
Yes, this comment I directly link to your question, which is that the pipeline growth is directly linked. At the end of the day people order our platform to deploy those new kind of services and so we’re obviously seeing momentum in the market whether it’s from the major MSOs here, BskyB in the UK etcetera is obviously indirectly, but very tangibly linked to the order flow on our side in the pipeline of opportunities. So I mean we are confirming that we see the major operators again starting to scale up more of those operations, starting to look at converged system where they can handle globally their TV and other devices’ needs into a single platform, looking at cloud architecture and global data center scalable architectures etcetera.
So we see the movement globally that benefits us. It’s just – the reason we’re cautious and those changes take time to materialize into orders and scale. So we are remaining prudent but obviously we see those improvements and like you, we see all these announcements of services and that’s all positive news from us – for us.
Thank you. As I am showing no further questions at this time, I would like to turn the call back over to Alice Kousoum for closing remarks.
Thank you everyone for joining us on our call today and we look forward to speaking with you next quarter.
Ladies and gentlemen, this concludes the Envivio third quarter 2014 earnings conference call. Thank you for your participation.
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