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Brightcove (NASDAQ:BCOV)

Q4 2013 Earnings Call

January 30, 2014 5:00 pm ET

Executives

Brian Denyeau - Senior Vice President of Technology Software

David R. Mendels - Chief Executive Officer, President, Chief Operating Officer and Director

Christopher Menard - Chief Financial Officer and Executive Vice President

Analysts

Tom M. Roderick - Stifel, Nicolaus & Co., Inc., Research Division

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

Jonathan Parker - Morgan Stanley, Research Division

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

Sameet Sinha - B. Riley Caris, Research Division

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

Operator

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

Brian Denyeau

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

During the call, we will make statements related to our business that may be considered forward-looking and are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements concerning our financial guidance for the first fiscal quarter of 2014 and the full year 2014; our position to execute on our growth strategy; our ability to expand our leadership position; our ability to maintain existing and acquire new customers; and statements concerning the acquisition and integration of Unicorn Media.

Forward-looking statements may often be identified with the 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 the material risks and other important factors that could affect our actual results, please refer to those contained in our most recently filed annual report on Form 10-K and as updated by our subsequently filed quarterly reports on Form 10-Q and our other SEC filings.

Also during the course of today's call, we will refer to certain non-GAAP financial measures. There's a reconciliation schedule showing GAAP versus non-GAAP results currently available 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 review of our financial results, market opportunity, as well as an update on our operations. Chris will then finish with additional details regarding our fourth quarter 2013 results, as well as our guidance for the first quarter and full year 2014.

With that, let me turn the call over to David.

David R. Mendels

Thank you, Brian, and thanks to all of you for joining us today on our fourth quarter 2013 earnings call. We're pleased to report results that were ahead of our expectations from both a revenue and profitability perspective and was highlighted by revenue of $29.7 million, which represents growth of 22% on a year-over-year basis.

From an annual perspective, we achieved a number of important milestones during 2013, including surpassing the $100 million revenue level, while also generating free cash flow. During 2013, we saw the beginning of what we believe is the second stage in the migration of video from traditional television to online digital video content that is consumed across an increasingly diverse set of devices.

In the first stage, content providers were simply focused on getting more and more video content online to meet the rapidly growing demand from viewers, but it was viewed as a distinct category from traditional video content. Establishing a credible online video presence was viewed as the goal, with monetization being a secondary priority.

This began to change in 2013 as content providers reached a critical mass of viewers who are increasingly demanding more and better digital content. We now see some digital content developers choosing to follow a digital and mobile first strategy, which recognizes consumers want to view content at any time and on any device. In this increasingly digital-centric world, it is becoming imperative that content providers are able to deliver a viewing experience that is comparable to the traditional broadcast TV experience for VOD, live and linear TV experiences. Of course, to do this, they must also deliver value to advertisers and the ability to monetize that content in a way that is comparable to, or better than, traditional broadcast.

As we recognize this evolution of the market, we see an exciting opportunity to capitalize on these trends with our recently announced entry into a definitive agreement to acquire Unicorn Media, a leading provider of cloud services for video ad insertion and multiscreen monetization.

This acquisition will represent a significant expansion of our focus and product footprint in the strategically vital media vertical. Unicorn's innovative cloud-based service eliminates the complexity inherent in trying to monetize digital content across a wide range of consumer devices in our hands and homes for VOD, live and linear TV experiences.

Unicorn's cloud-based technology makes it significantly easier to: monetize video across every device; monetize live video such as sports and events, which typically have commercial breaks at unpredictable times and at varying length. We're seeing a dramatic increase in the amount of live programming being produced by our customers; deliver and monetize linear TV and personalized screens to every user; and in addition, because Unicorn's flagship product, Once, works by inserting ads directly in the video stream as opposed to using software on the device itself, it is not susceptible to ad-blocking technologies that can lower revenue significantly. Unicorn customers report that ad-blocking technology can impact as much as 30% of their revenue.

Altogether, Once delivers rapid and material ROI to broadcasters and publishers seeking to move to a digital-first approach. We believe this approach is central to the future of TV. For a relatively small company, Unicorn has built best-in-class technology that has attracted a world-class customer list that includes 5 of the top 10 American media companies and marquee technology brands like ESPN, NBC News and The Weather Channel.

In the weeks since we've announced the Unicorn acquisition, the response from current and prospective customers has been overwhelmingly positive. As they quickly see the value of combining the robust functionality of Video Cloud with Unicorn's next-generation cloud-based video ad insertion service, which we will be rebranding as Brightcove Once.

We see a substantial opportunity to more aggressively target the media vertical following this acquisition, and we have created a fully cross-functional sales and marketing media team that would be headed by Anil Jain, who was previously the Head of Unicorn's Business and Corporate Development.

At the same time, we have decided to focus more of our resources in the premium market, which we believe provides for the greatest growth opportunity. As a result, we have decided to discontinue most of our existing Video Cloud Express offerings, specifically our $99 and $199 per month offerings. This has been a good business for us. And we will continue to support our existing Express customers. But we believe we will get a better return on our investment by focusing those resources directly to customers who can spend more significant amounts of money with Brightcove.

Looking at our performance in the fourth quarter, we had a solid quarter in our media vertical that included new customer wins with customers like Boston Globe Media Partners, Dick Clark Productions and TVN SA, the largest commercial broadcaster in Poland.

TVN will be deploying Video Cloud to manage and support a broad range of advertising-supported news and entertainment video content across desktops and mobile services. Video Cloud will also be used to help relaunch TVN's X-Link service, a B2B portal through which TVN syndicates and monetizes short form video content from businesses looking to deliver professional-grade digital content to its customers through a social channel, which is a similar model to YouTube. TVN selected Brightcove due to the breadth of devices we successfully target across multiple platforms and the support we provide for advertising and social sharing.

We also saw significant upsell activity during the fourth quarter with media companies like Al Jazeera Media Network and Rainbow Media Holdings.

While we are increasing our focus on the media vertical, non-media opportunities represent nearly 60% of our revenue and continue to be a significant market opportunity. During the third quarter, we saw solid deal activity with non-media customers, highlighted by new customer wins with Cubist Pharmaceuticals and VERITAS, among others. We also had good upsells with existing customers and recognizable brands like GE Healthcare, Weight Watchers and the Campbell Soup Company.

We also had a solid quarter of deal activity with Zencoder, including several 6-figure transactions. During the quarter, we signed deals with customers including Rosetta Stone and Applifier Oy, a Finnish mobile content company. Applifier Oy is an exciting use case where their business model is to provide a platform for app developers to cross promote their games by allowing their users to upload their gameplay to be shared, which is then sold to advertisers looking to target this engaged audience. They will be deploying Zencoder to handle the uploading and encoding of all of this user-generated content, which is a fast-growing area for many digital content providers.

Finally, we recently announced the addition of Derek Harrar to Brightcove's Board of Directors. Derek is the former Senior Vice President and General Manager of Video and Entertainment Services at Comcast, where he led all aspects of Comcast's flagship video business, including basic and digital cable, HD, video on demand and DVR services.

Prior to joining Comcast, Derek co-founded a Silicon Valley startup and was a technology investment banker for Morgan Stanley. We're excited to welcome Derek to our board and look forward to benefiting from his strong customer perspective.

In summary, the fourth quarter included several highlights for an exciting year for Brightcove. The explosion of online digital content is having a profound impact in the way media companies and brand marketers are able to interact with the consumers.

Brightcove is well positioned to be the cloud service provider of choice for customers looking to take advantage of this transition to improve their digital performance. With the acquisition of Unicorn Media, we believe we will extend our technology advantage versus the competition, as well as our value proposition to media companies. We're excited about the future and believe Brightcove will continue to benefit through the growth of digital content being consumed through the cloud.

With that, let me turn the call over to Chris to walk you through the numbers.

Christopher Menard

Thanks, David, and good afternoon, everyone. As David mentioned, we are pleased with our fourth quarter revenue and operating results, which exceeded our guidance on both the top and bottom line.

For the fourth quarter, total revenue was $29.7 million, a 22% increase from $24.3 million in the fourth quarter of 2012 and ahead of our guidance of $28 million to $28.5 million. Subscription and support revenue of $27.2 million was up 17% year-over-year, while professional services and other revenue was $2.5 million, which was up 121% from the fourth quarter of 2012.

As we discussed in the Unicorn Media acquisition call several weeks ago, revenue in the quarter exceeded our guidance primarily as a result of higher-than-expected overage and professional services revenue. The overage revenue upside was driven by one customer who subsequently entered into an add-on package during the fourth quarter in order to increase the size of their subscription, with the goal of reducing overage fees going forward. The outperformance in professional services revenue was related to engagements that were originally scheduled to finish in the first quarter, but were completed earlier than expected.

Turning to revenue mix. Our premium offerings generated $27.2 million of our total revenue, representing a 24% year-over-year increase, while our volume offering generated $2.6 million in revenue, a 3% increase from the fourth quarter of 2012.

As David mentioned, we are increasing our focus on the premium market in 2014, which is where we believe the greatest opportunity exists. As a result, we have decided to discontinue the $99 and $199 tiers of Video Cloud Express and have shifted the associated marketing dollars towards our premium offerings.

On a geographic basis, we generated $17.1 million of revenue in North America for the quarter, which was up 12% year-over-year and represented 57% of our total revenue. Europe recorded $8.2 million, a 44% increase from last year and 28% of total revenue, while Japan and Asia Pac generated $4.4 million of revenue for the quarter, up 34% year-over-year and representing 15% of total revenue.

From a vertical perspective, non-media customers represent 58% of our fourth quarter revenue and grew 17% on a year-over-year basis, while our media customers represent 42% of our revenue and grew 30% on a year-over-year basis.

While our market opportunity and product demand spans across a number of industries, media continues to be our most attractive market. The acquisition of Unicorn Media significantly expands our product offering and the level of spend we can target from media companies. And we will be aggressively targeting this opportunity with our dedicated media, sales and marketing organization.

Now let's turn to streams. Our year-to-date average monthly video streams as of December 31 was 963 million, up from 921 million at the end of the third quarter and up 38% year-over-year. 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 84% in Q4, which is lower than our target range due to a large customer who had renewed their contract with us at a lower level compared to their run rate in 2013. As we've said in the past, there are times when a customer will buy well ahead of their current consumption needs in anticipation of a significant ramp in utilization from their users and will then rightsize their agreement the following year if that revenue utilization doesn't materialize.

Looking at our customer count, we ended the fourth quarter with 6,318 customers compared to 6,367 at the end of the fourth quarter of 2012. Breaking this down further, we ended the quarter with 1,762 premium customers, a modest increase from the end of the third quarter. We had 4,556 volume customers at the end of the quarter, which was down 59 over last quarter.

While net customer adds is a relevant metric, as we've always stated, our primary focus is on maximizing the amount of revenue our sales organization can generate.

With the acquisition of Unicorn and the increasing focus on selling to media companies, we believe the growth in average subscription revenue per premium customer will become a more relevant metric going forward. In the fourth quarter, average subscription revenue per premium customer was approximately $56,000 per year.

Also in the fourth quarter, we had approximately 25 Video Cloud volume customers upgrade to premium, including University of Chicago Medical Center and University of Maryland School of Medicine, bringing us to just over 130 upgrades for the full year 2013, down from approximately 160 in 2012. With a reduced focus on the volume business, we would expect premium upgrades to continue trending down and become a diminishing feeder pipeline into the premium business.

Moving down the P&L. Our non-GAAP gross profit in the fourth quarter was $20.1 million, an 18% increase from a year ago and a gross margin of 68%. Subscription and support revenue represent approximately 92% of our total revenue and had a 73% gross margin, while services revenue represented approximately 8% of our total revenue and a 14% gross margin.

Non-GAAP income from operations was $1.7 million in the fourth quarter, an improvement compared to a loss of $1.4 million in the fourth quarter of 2012 and better than our guidance of a loss of $350,000 to income of $650,000.

Non-GAAP earnings per share was $0.05 based on 30.9 million weighted average shares outstanding, which was better than our guidance of breakeven to $0.01 per share, and an improvement compared to a per share loss of $0.05 on 27.9 million weighted average shares in the year-ago period.

On a GAAP basis, our gross profit was $19.8 million, operating loss was $1 million and our net loss per share was $0.04.

Moving to our full year 2013 results, total revenue was $109.9 million, which grew 25% year-over-year. Non-GAAP gross profit was $74.5 million, non-GAAP income from operations was $694,000 and non-GAAP loss per share was $0.00 based on 28.4 million weighted average shares outstanding.

Turning to the balance sheet. We ended the quarter with cash, cash equivalents and investments of $36.1 million, which was an increase from $34.1 million on September 30. Subsequent to the end of the quarter, we will spend $9 million of cash as part of the purchase consideration of Unicorn Media.

From a cash flow perspective, we generated $2.5 million in cash from operations and invested $1.5 million in capital expenditures during the quarter, which equates to free cash flow of $1 million for the quarter. This compares to $2.5 million of free cash flow in the year-ago period. For the full year, free cash flow was $3.4 million compared to negative $7.5 million in 2012 and a significant achievement for the company.

Our deferred revenue balance at quarter end was $23.8 million, up 24% year-over-year.

I'd like to finish by providing our financial outlook for fiscal year 2014 and the first quarter. For the full year 2014, we are reiterating the guidance we gave on January 6 for revenue in the range of $126 million to $130 million, which includes approximately $8 million to $9 million of revenue contribution from Unicorn and represents year-over-year growth of 15% to 18%.

As a reminder, our guidance reflects an approximate $3 million headwind from overage and professional services revenue, in addition to the impact of the lower contract renewals mentioned earlier.

We're forecasting a non-GAAP operating loss of $9 million to $12 million, which includes an $11 million to $12 million loss contribution from the acquisition of Unicorn. However, we expect Unicorn to begin having a positive impact on our non-GAAP operating income starting in the first half of 2015, and the combined company will return to non-GAAP profitability in the first quarter of 2015.

Non-GAAP net loss per share is forecasted to be $0.31 to $0.40 for the full year of 2014 based on 32.1 million weighted average shares outstanding. We are targeting negative free cash flow of $5.5 million to $7.5 million for the full year. From a modeling perspective, the first quarter will be the biggest use of cash during the year due to the timing of bonus and year end commission payments, as well as the timing of capital purchases.

For the first quarter, we're targeting revenue of $28.8 million to $29.5 million or 17% to 19% growth on a year-over-year basis. This includes a revenue contribution of $1.4 million from professional services. From a profitability perspective, we expect a non-GAAP operating loss of $2.9 million to $2.5 million for the first quarter. Non-GAAP net loss per share is expected to be in the range of $0.09 to $0.10 based on 31.1 million weighted average shares outstanding.

In summary, 2013 was a solid year for Brightcove, with strong financial results and a growing portfolio of cloud-based video technologies that will drive us towards the next level of growth in this emerging market. We are pleased with the achievements we made this year from both a financial and operational standpoint, and we remain confident in our ability to capitalize on this 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 the line of Tom Roderick with Stifel.

Tom M. Roderick - Stifel, Nicolaus & Co., Inc., Research Division

So let me take a swing here, just been looking at the fourth quarter a little bit. You announced a premium customer count that was up just modestly quarter-on-quarter. And I guess the temptation would be to sort of measure that or look at that against the guidance that you had previously offered here for the year that was a little bit lighter than people's expectations and kind of come to the conclusion that it was largely in the fourth quarter that something disappointing happened fundamentally. Is that a reasonable conclusion to draw? And to the extent that it is, are the things changing out there fundamentally, whether it's pricing, competitive dynamics, customers asking for more, sales cycles taking longer? Just trying to get a feel for -- with respect again to the forward guidance that you had previously issued, how much of it sort of was reflective of changing dynamics in the industry over the course of the last 90 to 120 days?

David R. Mendels

So first of all, just to reiterate some things we've talked about before is, we drive the team based on long term revenue growth, not on customer count. And so that is the most important thing, I think, and causes us to think about what are the right ways to give you metrics. And we can talk a little bit more about that in a minute. But -- so our focus on revenue growth and driving long term revenue growth and not in customer count. And second thing is -- and because of that, especially as we focus more on the high end of media and the high end in the premium digital marketing space as well and a little bit less on the low end of the Express customers or the customers that might flip up out of Express into the bottom end of our premium market, which starts around $10,000 to $15,000. We could easily have a scenario where you might not get 10 small deals of $10,000. And you might get 1 deal of $100,000. And you're neutral on the revenue side. But obviously, not as good on the customer count. So I think that's just the important thing for everyone to understand. I think secondly, there, I would say there is -- we don't see a fundamental shift in the market pricing or competition. It is a competitive market. I think we've said that every quarter. It's a fragmented competitive market, with a combination of DIY, some pure-play competitors, some people that compete with parts of what we do against us. And so we do compete in the market, but we're not seeing a significant change in the competitive dynamic. I do think that from an execution perspective, there's some things we probably could have done a little better in Q4. I wouldn't point to any one systemic issue in our organization, but rather just -- you go through the quarters and some of them you kind of feel like you rocked it and other ones, you don't. And I would say this one, we probably did not. And we could have improved a little bit in that regard. But we're not seeing systemic changes in the industry. I think on the contrary, we're very bullish on the market and the opportunity. It's why we've made this big investment starting the year with the Unicorn Media acquisition we announced a few weeks ago. We see that there is still the beginnings of a fundamental shift in consumer behavior. That the majority of spending on advertising for video is still on traditional TV, 95%. And as more and more consumers consume video over the Internet, both on devices and in their living rooms with game consoles and Chromecast and AirPlay and other devices like that, smart TVs, more and more of that will come online and will help drive our business. And so, when I'm thinking about the big picture, we still remain quite bullish on the opportunity in the market. I would say that we weren't perfectly happy with the number of customer adds, but that is -- then to balance that, that's not what we spend the quarter thinking about. We spend the quarter thinking about the revenue growth.

Tom M. Roderick - Stifel, Nicolaus & Co., Inc., Research Division

Great. Chris, maybe turning to you. The Unicorn Media business model, you talked about it on the last call a little bit about the variable nature of the revenue stream. Can you just remind us sort of how that variable nature flows into your model? And particularly now that you've had another 3 weeks to sort of look at the data a bit more closely and watch the revenue stream in real time, what can you tell us that you've learned about the nature of that revenue stream, particularly as it relates to any element of seasonality, given the advertising exposure there?

Christopher Menard

Sure. You're right. We've had a little bit more time to really dig into the model, et cetera. And just to remind folks on the phone, their contracts are predominantly set up with a minimum committed amount, which is anywhere from a couple of thousand up to maybe $5,000 or $10,000 a month on average. And then the rest of the revenue is based on actual usage, paid for by streams. And they count streams a little bit differently than we do. They look at the individual ads shown, as well as the content. And then that revenue is taken on a monthly basis as those streams are incurred once you go over the small monthly minimums or commits. There's not a ton of seasonality in the data. That for the most part once customers get up and running, it appears fairly consistent like any other. It depends on the property, obviously. Some have more swings than others. But we've been talking to these guys and working with them for more than the last couple of weeks. We were talking to them for months before we did the acquisition. So we got really comfortable with their methodology for forecasting. And we've carried through the knowledge that they gave us as we set the guidance for this year and made our own tweaks along the way. So I'm comfortable with the guidance we gave for this year.

Tom M. Roderick - Stifel, Nicolaus & Co., Inc., Research Division

;

Okay, good. And Chris, last quick one for you. Last year in the 10-K, you provided a backlog number. Is that something you could share with us today? Or should we just wait for the 10-K on that?

Christopher Menard

Yes, I don't actually have the unwind and part of that disclosure is how much is scheduled to be recognized this year. I just don't have it with me, but we'll have it in the 10-K.

Operator

Our next question comes from the line of Terry Tillman with Raymond James.

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

So Chris, a couple of financial questions first. You were kind enough to give us pro services for the first quarter of '14. I think you said $1.4 million. Can you give us a sense of what the full year, just a rough guess it might be for the full year?

Christopher Menard

Yes, I'd say somewhere between 4% and 6%.

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

Year-over-year growth?

Christopher Menard

No, the total revenue.

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

Oh, but percentage of total, okay, yes. All right. And then in terms of -- I mean, one of the key things, I think, that's important to look at -- and I don't know if you have the data here -- but you did quantify the impact or the headwind in '14 in the core business excluding Unicorn of the overage and the pro services that came forward versus '14. I think you said about $3 million. But these 2 lower dollar renewal customers, I mean, I'd love to get just some directional sense. Are we talking 7-figures each or combined at least 7-figures, because it's pretty important then if we try to normalize your initial guidance for '14 on the core business.

Christopher Menard

Yes, I think combined, it's a pretty big headwind, I would say. It's a couple of points of growth or a lack of growth as you think about it going into next year. Because it's only 2 customers, I don't want to give you exact point numbers. And to be fair, 1 of the 2 that we talked about on the call on January 6, we're not fully through and closed up on yet. So it'd be inappropriate for me to give you any more commentary at this time.

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

So even excluding the impact -- so if we don't even look at that analysis, the overage and the pro service is $3 million headwind, so really the core growth is low to mid-teens. And then if we were to normalize for this, a couple more points, we're talking mid- to high-teens organic growth.

Christopher Menard

It's a fine line where the high-teens start and where the mid-teens end, but somewhere in that mid-teens neighborhood, yes.

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

All right. So then I guess another question. And I don't know if this is for you, Chris or David. But in terms of Unicorn, I guess I'd love to hear what kind of strategies are in place or going to be executed as quickly? Is it something we should think about quickly in terms of being able to take your big media sales force and take this product and sell it in a big way? Or is that going to be a slower ramp? Because what I'm getting at is, the $8 million to $9 million in contribution assumption from Unicorn, how much is actually baked in on revenue synergies of your sales force going out and selling it?

David R. Mendels

Well, let me start by -- I'll answer the first -- a part of this, and I'll hand it off to Chris from there. So first of all, the combined sales force will be off and running the day we close. We already had a chance, certainly, to meet each other. We obviously have a lot of training to do, but we are excited. The combined sales force is excited. The executive team is excited. We're getting out to customers. We already had preliminary discussions with customers at the CES trade show the week we announced. And so feedback has been good. And you can absolutely expect that our team will hit the ground running to start to acquire new customers and grow the business. Now that said, it's not necessarily something where the -- you close the deal and the revenue happens overnight. It depends on the project and the customer in terms of what their ramp is and how that goes. And we've talked about -- they have typically done -- and this will probably evolve over time to match more of the traditional Brightcove model or closer to it at least. They've typically done low commitment deals, but that grow over time with actual usage. And so we'll see an impact hopefully in terms of getting customers started. But in terms of the revenue ramp, I'll let Chris say if there's anything more we can add to the guidance we've already given.

Christopher Menard

I think your question was, how much of it is based on the sales force that we're bringing to the table versus the sales force that was existing. Is that right?

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

Yes.

Christopher Menard

So we've inherited a really great team of sales professionals who understand the marketplace, know their accounts pretty well. It's a little bit of a hodgepodge because as we go through and set up the new sales and marketing unit, it's a named account model, so some of the existing Unicorn customers will be assigned to Brightcove and vice versa, and some of them are joint accounts. So it's hard for me to tell you exactly what the split is between how much our reps will help in terms of pull-through versus their reps. It's a number that we feel confident in and we're pretty happy with the sales team that we have going after it. It's hard for me to quantify it for you.

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

Okay, okay. And I guess just a final question for David or Chris is just, you've now been at it for well over 12 months in terms of a dedicated big media sales force. I'd love to get some perspective, given you've had a lot of experience now in terms of, is it still primarily where you're selling Video Cloud and it's replacing a DIY environment? Or you're seeing some good pull-through of Zencoder? And then I guess the second part then is, given what you've seen to date, does it inspire you to add more sales capacity on the big media side?

David R. Mendels

I'll answer the last question first, which is, we just did add a bunch of sales capacity, both by adding the Unicorn folks, which wasn't a big team, but given that the media team was a subset team, it is a significant percentage increase in the dedicated media team. And secondly, with just internal configuration. So we have increased the sales team. We do feel good. On the first part of the question, I think that we are selling Video Cloud. We are selling Zencoder. But we're very much seeing something that we have talked about before, which is, we've been moving architecturally our product towards a more modular approach, where customers can buy it and integrate it in ways that they want in terms of the way it can integrate with different services. And we've talked some about bringing out a new player service, for example. We'll have the new Once service for dynamic stream management and stream -- and ad insertion. And so I think what we'll see over time is -- the way we think about it is, we now have this portfolio of services that offer a suite, a range of different things that, that large media customer can use. And we can go in and start with one and grow to the next or we can go in and sell the whole suite at once. So it gives us more choices and more ways to get into an account. And that really comes out of our learning from the way customers want to buy, the way they want to adopt our technology.

Christopher Menard

And Terry, just to add to that, I think you're seeing the result of the media team just if you look at last quarter, media revenue was up 30% year-over-year. And just to add to what David put in his list, we're also selling professional services. Professional services was up over 100% in the fourth quarter. Some of that was the stuff we pulled out of the -- what we expected to be in the first quarter, but a lot of our professional services deals come from that media segment.

David R. Mendels

Let me -- I'll add one more thing. Unrequested, but I think it adds a little more color here, which is, one of the deals that we highlighted in the script was TVN, which is probably a broadcaster that not everyone on the call is familiar with because they're in Poland. But this is one of the things we like about this market. And we've talked in the past with our customers down in Australia, for example, or down in New Zealand. So even in small or medium-sized markets, you still have major broadcasters that can be very significant customers. And so that was a great win for our media team, new logo and a good result of the focused effort that we had in Europe.

Operator

Our next question comes from the line of Jennifer Lowe with Morgan Stanley.

Jonathan Parker - Morgan Stanley, Research Division

It's actually Jon Parker calling in for Jennifer. I guess one of the sort of questions that I'm getting a little bit is, obviously, you're talking about how the add number is probably a little bit less relevant than going after the total value of customers. But one of the things we have seen, I think, in Q4 last year and now 2 customers this year are some customers that are larger customers that are either renewing at lower dollar values or, in some cases, maybe leaving the platform for various reasons. As you think about going forward and maybe more of a focus on these high end customers, I mean, how do you think about the balance and the risks of larger customers in general and the possibly of those churning off versus having a more stable midsize type businesses to offset some of that churn?

David R. Mendels

Well, I'll give you a couple of things. One is, I like the fact that we have a portfolio of customers. That we have large and medium customers as well as both media customers and non-media customers. So I think you're hinting at a good point there, which is, it's valuable to have diversification so you can deal with different trends in different markets and you can balance if a given geography or a given vertical is doing better or worse. So that is a good thing. That said, I would say that, we don't generally see more instability with the big customers. Where we see more instability is often with what I would call speculative ventures that sometimes they're big, sometimes they're small, but that are trying to enable a new business model with web content. And obviously, this is a very dynamic space. There's lots of people who want to be the next Hulu or want to be the next Netflix and things like that just to give you a kind of a flavor of it. And some of them are very well funded and come in, and we do some good business. And some of them come in and end up having to rightsize because they don't achieve all their goals. And so that is a subset of our customers. But when we talk about going after major media, when I think about the named accounts, we're thinking about major companies in North America, Europe and Asia, some of which we've talked about in the past, companies like Viacom or The Weather Channel. And those are not speculative media ventures. And so I think we have a good portfolio. We do sell this sometimes to people who have more volatile business. But overall, I don't think the focus on major media is going to cause any downside or increased volatility, no.

Jonathan Parker - Morgan Stanley, Research Division

Okay, great. And then sort of to -- I think it was Tom's question that kicked it off, if we sort of look at the normalized sort of organic growth profile for next year, I think we're looking around 12%, adding that $3 million back. If you think about that in context of a lot of the secular growth drivers that we look at in terms of online video growth, which I think you've talked about is your 30%-plus and your online advertising spending. Sort of thinking about that number in the context of sort of the strong growth in video that we're seeing. There is a bit of increasing delta between the 2. I'm just wondering, is there anything different in the market today, any more difficult times you're having versus 12 months ago or 24 months ago? And how -- what do you ultimately think sort of the sustainable growth profile for this business or for the market is in general?

David R. Mendels

So I don't think that there is anything fundamentally different in the market from 12 months ago. We still have a very competitive fragmented landscape with small companies, with people doing DIY and the like. But we still have a leadership position. We don't see any fundamental change there. We haven't seen significant change in pricing to speak of. We do see customers that are more sophisticated in some cases. And so their demands are high. That have greater needs that -- I mean, certainly, we made the decision to buy Unicorn very much out of the needs we're hearing from the major customers that -- to reach all of the devices that they want to reach and achieve their monetization goals. We felt like that was the right thing to do and it gives us the capacity to go after it. So we're seeing some more sophisticated customer needs that we didn't see a year ago. And that's helping to drive our strategy without a doubt. And I think that will be very powerful for us in 2014. But other than that, there aren't -- the market hasn't changed fundamentally, no.

Jonathan Parker - Morgan Stanley, Research Division

Great. And the last one with me, looking at sort of the geographies of Europe has clearly been really a nice highlight for you guys, especially in the last couple of quarters. When you're thinking about the investments going forward and the go to market, how are you thinking about prioritizing them geographically? Is Europe sort of an area that you guys are going to -- and obviously, you just highlighted the win in Poland. Is that an area that you're going to continue to sort of emphasize and see it as a nice growth tailwind for you guys going into next year?

David R. Mendels

We do think there's good opportunity in Europe. In general, I think we also feel very strongly about the Asia Pacific Japan region. Earlier in the year, we talked a lot about the wins that we've had in Australia and New Zealand. And those have definitely been -- they definitely play into that stronger media growth that we've had this year. It's coming from that region as well. But of course, as a technology company here in North America, and to sort of win the market leadership battle, the perceived market leadership battle on a global basis, we also have a strong focus on the major media accounts here in North America, the flagship accounts, the brands that people know worldwide. So I would say, it's a pretty balanced approach, but you'll definitely see continued investment in Europe, in Asia Pacific. And in general, the smaller regions have the potential to grow at a higher rate just because of the law of small numbers.

Operator

Our next question comes from the line of Steven Frankel with Dougherty.

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

David, maybe you could start by giving us an update on the Zencoder Live product and how that pipeline looks?

David R. Mendels

The Zencoder Live product, we've had some great wins. It works both standalone for customers who want to adopt it where they want to integrate with an API and build it into a workflow, but it also works with our Live module that comes with Video Cloud, which provides a really nice user interface for people to set up and manage those streams without having to be very technical. We have had some great wins over the course of the year on the State of the Union on Tuesday night when Obama was speaking. I went to 3 of the major news sites in America, and they were all using Live coming from Brightcove. But -- so there's plenty of good examples here, but we don't break out our pipeline by product line.

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

Okay. And then for Chris, could you walk us through maybe the gross margin impact of Unicorn once that gets integrated into the numbers?

Christopher Menard

Sure. On the license side, we ran at about 73 points last year for the total year. Their gross margin profile is not as high as ours at this point. So we'll lose a couple of points on the license line. However, because we did see in the fourth quarter that we turned the corner on pro serv and we made money. We probably will bounce around breakeven plus or minus $100,000 to $200,000 each quarter next year, but that is a big improvement overall. So even though we're going to go backwards a little bit on the license line, our overall gross margins will be about the same, give or take 1 point for the year. So somewhere in that 67% to 68% range overall.

Operator

Our next question comes from the line of Sameet Sinha with B. Riley.

Sameet Sinha - B. Riley Caris, Research Division

A couple of questions here. First, in terms of the Unicorn Media deal, so in terms of the guidance that you had provided, how much of Q1 revenue and operating income includes or what -- how much is the contribution from Unicorn? And secondly, could you talk about just in terms of the guidance that you -- by the core -- the organic growth guidance seems like expenses are going to go up another $9 million, $10 million. What are the major pockets where the expenses are going? One, I guess, I could point to is that this year you probably have 4 customer summits instead of 1. Does the expense go up 4x over there? And the last question would be, in terms of -- if you look at the rest of the year, you've spoken about a portfolio approach. What other products -- I mean, you have Live, which you're obviously introducing into the market. Now you'll have the product from Unicorn. Then in the modularity aspect, kicking in some time middle of this year. Anything else in the pipeline that could launch this year or next that you can talk about?

Christopher Menard

Yes. So that was really like 5 or 6 questions. So hopefully I'll try to get through all of them. The first one in terms of the guidance, we're not going to breakout Unicorn separately, both from a guidance or an actuals perspective for the revenue or the operating income. The second one was in regards to the incremental expense. I think the biggest thing you're going to see is incremental dollars in research and development. We added a bunch of heads on our own and plan to add some heads in the first quarter, first half of this year because of some of the initiatives David has outlined before. But we also picked up Unicorn's team of people, which will be about 65 or so at closing. A good portion of those sit in the product organization. And you'll start to see those expenses flow through our P&L. The PLAY events, which you mentioned, the 4 events versus 1. It's actually not a big change in the overall cost structure. Instead of being one big multi-day event here in Boston, there are 4 smaller one-day events in different geographies. So a little bit more from a T&E perspective, but the overall cost will be roughly the same, give or take, $100,000 or so. You will see, as I talked about on Steve's question, a little bit more expense on the license line, the cost of the subscription. And we're going to go backwards 1 point or 2 in terms of what the margin on the license. But again, we'll make that up in services, so our overall gross margin will be about the same.

David R. Mendels

And on the product question, we're not making any new product announcements today. We're really excited about the new one we're just about to be able to start selling with the Unicorn Once product. But certainly, you'll continue to see innovation and evolution of everything we do. We got a great development organization that is really adapting to the things we're seeing in the market in terms of the platforms, as well as the customers are telling us. And there'll be a lot of exciting stuff throughout the year. But no new product announcements per se today.

Sameet Sinha - B. Riley Caris, Research Division

One final question, if I can sneak in. This customer that you are waiting to sign up -- re-sign, any risk to that customer not re-signing? I mean, is it competitive or other pieces out there? Or you're just negotiating kind of sort of the legalese of the contract?

David R. Mendels

No risk.

Operator

Our next question comes from the line of Brendan Barnicle with Pacific Crest Securities.

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

Great job on turning around the media business, but I was curious the non-media business only growing 13% and North America only growing 12%. What are the execution issues that are occurring in those markets that are kind of weighing down growth there? And what can we look for to see sort of acceleration in those this year?

David R. Mendels

Sure. I think that in terms of execution, there's no one systemic issue, as I said earlier. I think that we always can do better. We've got an aggressive organization. And we are constantly looking at the whole flow of the lead funnel and the sales execution pipeline. I think there are optimizations and improvements we can make. So I wouldn't say we aren't, but there's no one thing I can point you to that is significant. On the product side, we have focused more on the digital media side and most of our announcements and key initiatives had been on that side. And so it has gotten some disproportionate focus deliberately and on purpose. And because of that, we've gotten some better return there. And that, again, was strategic and intentional. I do think that there are opportunities for innovation and progress on the digital marketing side and addressing some of the needs of those customers. And so I think we will have some things coming out this year that we'll be able to talk about in future conference calls, but it's premature to talk about that today. We're not quite there. But that is an area we're looking at opportunity.

Christopher Menard

Yes. And Brendan, I apologize, I may have mumbled through that paragraph. Non-media was up 17%.

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

Okay, 17%, yes, great.

Christopher Menard

And just another, just as we talk about the geographies, because we are still kind of small, where the pro serv lands in a given quarter can move your growth rate around by a couple of points. And we did have a really strong pro serv quarter and some of those deals were not in North America.

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

Great. That's helpful. So I guess my bigger question is, as we step back and look at where this business organically can grow to, are we talking about it can return to 20-plus percent growth? Or are we going to be sort of really realistically in the more of the mid-teens?

David R. Mendels

So the guidance is the guidance. So it is what it is. [indiscernible]

Christopher Menard

It's the makeup. So one of the things to think about, sorry, is that a lot of the revenue we're going to pick up from Unicorn on day 1 is going to be North America. And so it's going to shift our composition a little bit as we report next quarter.

David R. Mendels

But I do want to step back. I was going to make another point there. We've given guidance that takes up that into the high-teens for this year. And we're excited about that. When I step back and look at the fundamental market opportunity in the next several years, is there opportunity for faster growth? Absolutely. And we're working on all of the things that we can do from an execution perspective and a strategy and a product perspective. And so we're very bullish. And so we're very much focused on how do we drive growth as being the single most important thing that we work on.

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

Great. And then Chris, you gave us this number of the enterprise subscription, I think, average spend, your ASP number there. What's the compare with a year ago?

Christopher Menard

Yes. That's $56,000 per year was the annual. And it's about 8.5% compared to last year, up 8.5%.

Operator

Our next question is a follow-up question from Sameet Sinha with B. Riley.

Sameet Sinha - B. Riley Caris, Research Division

Have you quantified -- I mean, if you are going to be deemphasizing the Express product line, how much of a headwind would that create?

Christopher Menard

We haven't put it out there in terms of the headwind. So remember, we're still keeping the $499 version -- edition. And we're going to continue to sell that. The volume business was only up 3% overall in the fourth quarter. We didn't break out what we're expecting the volume business to do next year, but we'll keep you guys posted as we close Q1.

Operator

We have no further questions at this time. I'd like to turn the floor back over to management for closing comments.

David R. Mendels

Well, I want to thank everyone for joining us. I think that we executed financially very strong last year with being able to achieve our revenue and profitability targets, achieving profitability a quarter early and generating cash. And we're excited about that. As we come into this year, we're even more excited with the acquisition of Unicorn Media, the opportunity we see in front of us. We see sort of a lot of wide-open opportunity to grow the business based on the fundamental trends we see in the market, and what we're hearing from customers. So thank you for your time, and we're excited to kick off the new year.

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.

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