Qumu Management Discusses Q4 2013 Results - Earnings Call Transcript

| About: Qumu Corporation (QUMU)


Q4 2013 Earnings Call

February 24, 2014 4:30 pm ET


Douglas Sherk - Founder and Chief Executive Officer

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

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


Jeffrey Van Rhee - Craig-Hallum Capital Group LLC, Research Division


Good day, ladies and gentlemen and thank you for standing by. Welcome to the Qumu Fourth Quarter 2013 Financial Results Conference Call. [Operator Instructions] This conference is being recorded today, Monday, February 24, 2014.

I would now like to turn the conference over to Doug Sherk with EVC Group. Please go ahead, sir.

Douglas Sherk

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

Before we get started, during the course of this conference call, the company will make forward-looking statements about its future plans, objectives, beliefs, expectations and prospects. For this purpose, any statements made today that are not statements of historical fact may be deemed to be forward-looking statements. These forward-looking statements are not guarantees of future actions, outcomes, results or performance. By their nature, these forward-looking statements are subject to many risks and uncertainties that could cause actual results to differ materially from the results discussed in or implied by the forward-looking statement. A discussion of the risk or uncertainty that affect Qumu's business is contained in the company's SEC filings, particularly under the heading Risk Factors and in the press release issued this afternoon. Copies of these documents are available online from the SEC or on the Qumu website.

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

In addition, to supplement the GAAP numbers, we have provided non-GAAP information that excludes severance expenses, the amortization of Qumu acquisition intangibles, and for 2012, the impact of noncash charges for goodwill impairment, the intangible asset impairment and deferred tax valuation allowance.

We believe these non-GAAP numbers provide meaningful supplemental information and are helpful in assessing our historical and future business performance. A table reconciling the GAAP loss per share information to the non-GAAP information is included in our financial release.

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

Sherman L. Black

Good afternoon, and thank you for joining us on our conference call to discuss our fourth quarter and full year 2013 performance, as well as our initial thoughts on 2014. With me today is Jim Stewart, our Chief Financial Officer.

As we noted in our news release issued this afternoon, we generated fourth quarter revenues of $20.7 million, which were slightly above the high-end of our guidance range and roughly flat with last year's fourth quarter. We grew our cash and marketable securities position from the end of September by $2.6 million and ended 2013 with $51 million in cash and marketable securities on the balance sheet and we continued to demonstrate solid progress in our Software business, setting new records for contracted commitments and backlog.

The fourth quarter capped a year of many accomplishments for Qumu. We made significant operational improvements to our disc publishing business, while continuing to innovate in our Software business and position it to scale. These actions laid the foundation for the topline growth we expect to achieve in 2014 and beyond.

First, we made a significant investment in our Software business technology. During 2013, we expanded our enterprise integrations and leading portal platforms, such as IBM Connections and WebSphere and Microsoft SharePoint 2013.

Our leadership and secure mobile video was also strengthened, with the launch of dozens of apps across major mobile platforms. Our investments in cloud and hybrid cloud offerings are resulting in growing pipeline of opportunities. And our focus on ease-of-use resulted in significant improvements related to the user experience of our core offering.

Second, we invested in Qumu sales and marketing initiatives, with a significantly expanded sales and support footprint, as well as a new website and branding.

Third, we changed our corporate name to Qumu to reflect our focus on the opportunity we see in our Software business. This has helped to raise the profile of our brand with our target markets and was one of the factors that led to an increase in web hits, inbound inquiries and a growing pipeline of Software business. During 2013, we added sales resources in 5 international locations, including Frankfurt and London in Europe, Dubai in the Middle East and Singapore and Tokyo in the Asia Pacific region. Our global customer footprint also expanded, with key customer wins in these regions and in a wide array of industries.

Finally, recognition from independent third parties was a key accomplishment for Qumu in 2013. Frost & Sullivan was the most recent industry research firm to recognize Qumu's leadership in the market. In a report published in January 2014, Frost & Sullivan named Qumu as the market share leader in global enterprise video webcasting solutions based on the results of a recent study that compared the offerings of 17 providers of enterprise video webcasting services and ranked them on functionality, product line strategy, pricing models, geographic footprint and partnerships. In its conclusion, the Frost & Sullivan report noted that Qumu is positioned to leverage its cloud offerings, mobile streaming and integration packages to help Qumu compete in the SMB market.

We were honored to receive this acknowledgment. Moreover, it complements the recognition we've already received as a leading player in Gartner's Magic Quadrant, as well as Forrester's recognition of Qumu as a leader in video platforms for the enterprise. These industry reports are helping to drive awareness and interest with enterprise customers. We also made some significant changes to the disc publishing operating model, which lowered operating cost to reflect the declining market. These changes contributed to the disc publishing team's strong second half revenues and thus, delivering significant cash from operations for the year.

Our results in the fourth quarter reflect the impact these actions and accomplishments are beginning to have on our business and the growing demand for enterprise video content management solutions.

In the fourth quarter of 2014, Qumu software generated record contract commitments of $9.8 million, an increase of $6 million from the commitments in the third quarter. In addition, backlog increased to a record $16.7 million at December 31 compared with $10.7 million at the end of September.

We brought on several new customers during the quarter, representing a cross-section of industries that included a global financial services institution, a leading e-commerce company, a large healthcare provider, a national healthcare insurer, a semiconductor company and our first Japanese customer, a network solutions provider based in Tokyo.

I'm confident that the adoption of video by enterprises as a primary means of communication will continue to accelerate in 2014. Enterprises have made significant improvements in productivity, but they're on the outer edge of efficiency improvements. They remain challenged in harnessing the power of their globally distributed virtual teams. Video is being recognized as a catalyst for social business and collaboration, as it's one of the most authentic and transparent modes of communication, as well as being an effective tool for accelerating employee engagement, sharing knowledge and best practices.

We have high expectations in 2014 for our Software business and are optimistic about the outlook for capturing additional share in a growing enterprise video market. Enterprise customers value our differentiated product features, including secure video delivery, breadth of enterprise integrations, flexible deployment either on the cloud, on premise or a hybrid combination, and rich mobile apps. Qumu software consistently delivers a quality differentiated solution to meet all these needs and that is the major factor behind our expectation that Qumu software committed contracts in 2014 will grow by at least 30% to 50%.

Turning now to disc publishing. Disc publishing revenue in Q4 was $16.5 million, slightly higher than $16.4 million in the fourth quarter of the prior year. This was higher than we anticipated and reflected higher service revenues and a small increase in hardware sales, partially offset by lower revenue from consumables. The increase in hardware sales was due to some unexpected pockets of demand in the market, which was captured by our disc publishing team.

As we said before, we do see opportunities with select applications, such as surveillance, entertainment, Medical Imaging, photo retail and financial services. We expect the disc publishing technology will continue to be utilized by these markets and with the cost recognition -- or cost reduction efforts we undertook in 2013, we believe this business is optimized to continue to effectively serve its customers, while generating significant cash from operations.

In summary, 2013 was a significant year, as we took steps to lay a foundation that would enable us to improve our competitive position and grow significantly in 2014 and beyond. We're very optimistic about the outlook for our company in the year ahead. The video content management market is growing and moving up the maturity curve. Mobile, social, cloud and bandwidth expansion, they're all trending in our favor. Video is becoming more widely adopted for a variety of uses, from employee engagement to enterprise-wide collaboration.

Applications for video are moving well beyond the c-suite in businesses today, and Qumu's at the forefront of making all that possible. I'm confident that we've made the necessary early investment to deliver a differentiated platform. In 2014, we'll be focused on executing our strategy to drive software contracted commitments and revenues and plan to use the cash generated by the disc publishing operation to continue to make investments in our software opportunity.

Before I turn the call over to Jim, I'd like to thank the Qumu employees for their dedication and hard work in 2013. I'd also like to thank our customers, our partners and our shareholders for their support.

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

James R. Stewart

Thanks, Sherman. I will begin with a review of our P&L. Revenues in the fourth quarter totaled $20.7 million, virtually flat with revenues in the fourth quarter last year. Software revenues were $4.2 million in the recent fourth quarter compared with $4.3 million a year ago. Lower due to the timing of revenue recognition of contracted commitments. Europe's software revenues accounted for 25% of total software sales in the quarter.

As Sherman mentioned, software contracted commitments were a record $9.8 million compared with $8.7 million last year and up from $3.8 million in the third quarter. The majority of these contracted commitments went into backlog and were not recognized as revenue in the fourth quarter.

Backlog, as software contracted commitments, ended the year a record $16.7 million compared with $10.7 million at the end of September 2013. Disc publishing revenues totaled $16.5 million, a slight improvement from $16.4 million in revenues in the fourth quarter of 2012. The increase reflected higher service revenues and slightly higher hardware sales, partially offset by a decline in consumables revenue.

Disc publishing hardware sales increased 2% from the fourth quarter of 2012, with higher hardware revenue in Americas and APAC, partially offset by lower hardware revenue in Europe.

Fourth quarter recurring revenues for the disc publishing business, defined as consumables, parts and service, were flat with last year. Consumable sales of printer ribbons, cartridges and optical media were down 4%. This decline was offset by an increase in parts and service revenues due to higher service attach rates, and increased revenue from equipment rentals during the quarter. These disc publishing recurring revenues represented 55% of total company revenues in both the fourth quarter of 2013 and the prior year.

Fourth quarter disc publishing international sales were up 1% from the fourth quarter of 2012. These sales represented 33% of total sales in the recent fourth quarter, unchanged from the fourth quarter of 2012. Changes in the currency exchange rates did not have a material impact on our revenues in the quarter, with positive euro changes offsetting negative currency changes in Japan.

Fourth quarter disc publishing sales in Europe decreased 4% from the prior year, as a slight increase in service and parts revenue was more than offset by lower hardware revenue. Disc publishing sales in Asia-Pacific increased 10% from the fourth quarter of last year, primarily due to higher hardware sales in China and Japan.

Moving down the income statement. Gross margin was 48% for the fourth quarter of 2013 compared with 51% last year. Software gross margin in the fourth quarter was 50% compared with 71% in the fourth quarter of 2012. The decrease was a result of less perpetual license revenues sold versus the prior year and increased service cost to support future growth. We expect software gross margins to improve from the fourth quarter 2013 level in 2014.

Disc publishing gross margin was 48%, an improvement from 46% in the fourth quarter last year, driven by better service margins, higher consumables pricing, product cost reduction and a better sales mix. Fourth quarter operating expenses were $12.7 million compared with $12 million in the fourth quarter of 2012. The increase was largely due to higher consulting cost, professional fees and incentive compensation expenses that were partially offset by lower disc publishing R&D and sales and marketing expenses, reflecting the impact of cost cutting measures implemented earlier in 2013.

The higher incentive compensation cost were due to overachievement of employee's short term and long-term incentive plans. The impact of this overachievement and truing up these annual plans for actual performance increased fourth quarter operating expenses by $1.2 million compared with prior quarters in 2013.

As Sherman mentioned, we took a number of cost-cutting initiatives in the disc publishing business last year to optimize its cash generation capabilities. At the same time, we made investments in our Software business in sales and customer support.

Fourth quarter disc publishing operating expenses totaled $6.1 million compared with $6.3 million last year. Without the increased expense of the consulting, professional services and the higher incentive compensation cost, disc publishing operating expenses would've been significantly below last year. Software operating expenses in the fourth quarter of 2013 were $6.6 million compared with $5.6 million a year ago.

Total company R&D expenses were $2.8 million in the fourth quarter, compared with $2.9 million last year. Lower disc publishing R&D headcount and project spending were the drivers of this reduction that more than offset higher costs in the Software business.

Fourth quarter 2013 SG&A expenses totaled $9.7 million compared with $8.9 million a year ago. Excluding the impact of the higher consulting, professional services and incentive compensation cost, SG&A would've been below the 2012 fourth quarter, with higher G&A expenses offset by a decline in sales and marketing expense.

The net loss in the fourth quarter was $2.7 million compared with a net loss of $1.1 million in the fourth quarter last year. On a per-share basis, excluding amortization charges, the non-GAAP net loss in the fourth quarter was $0.28. This compares with the loss of $0.09 per share in the fourth quarter of last year on a comparable non-GAAP basis.

For the full year, total company revenues were up 4% to $82.5 million compared with 2012. Software revenues increased 80% to $17.7 million, a strong comparison to our guidance throughout 2013 of at least 70% growth. Software contracted commitments totaled $21.4 million, 9% above 2012's total commitments. The $16.7 million year-end backlog of contracted commitments was $5 million higher than at the end of 2012.

Disc publishing revenues fell 7% to $64.7 million, with a significant decline in hardware revenue, partially offset by an increase in recurring consumables and service revenues. These recurring disc publishing revenues actually grew 3.5% compared to last year. Gross margin was 48% for 2013 versus 49% last year. The net loss for 2013 was $9.7 million compared with a loss of $48.3 million last year, which included 3 non-recurring charges. These charges related to the write-off of goodwill, reduction in the fair market value of intangible assets and the establishment of a valuation allowance against deferred tax assets. Excluding these charges, the non-GAAP net loss for 2012 was $5.7 million. On a non-GAAP basis, excluding amortization, severance expenses and onetime charges, the loss per share was $0.89 in 2013 compared with a non-GAAP loss of $0.57 in 2012.

Now turning to our cash position. Cash and marketable securities totaled $51 million at December 31, 2013, compared with $48.4 million at September 30, 2013, and $50.1 million at the end of 2012.

During the fourth quarter, we generated approximately $2.7 million in cash from operations, which included a $1.9 million federal tax refund. The positive cash flow reflected improved working capital management as well. Receivables and inventory at December 31 were down $1.3 million from the end of September.

Capital expenditures totaled $95,000 in the quarter. For the full year, we generated $2.4 million in cash from operations. Capital expenditures totaled $1 million.

We did not buy back any shares of Qumu stock during the fourth quarter. We have approximately 778,000 shares remaining on our repurchase authorization and may repurchase shares from time to time during the year depending on market conditions.

For 2014, we expect contracted commitments to increase 30% to 50% compared to 2013. We also anticipate continued growth in our software revenues of at least 30% over 2013. The growth in software revenues is expected to be partially offset by continued declines in disc publishing revenues. For total year 2014, we expect cash used in operations to be in the single-digit millions. For the first quarter of 2014, we expect revenues of $18 million to $20 million.

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

Question-and-Answer Session


[Operator Instructions] Our first question comes from the line of Jeff Van Rhee with Craig-Hallum.

Jeffrey Van Rhee - Craig-Hallum Capital Group LLC, Research Division

A number of questions for you. First, just talk to me about the -- on the software side in terms of the pipeline going into Q1 here after such a huge quarter there in Q4. What's left in the pipe? What's -- are we in a situation where you've got to rebuild and we'll see meaningful progress later in the year? Just give me a sense of the health of the pipe if you would?

Sherman L. Black

Yes, Jeff. Thank you, by the way. This is Sherman. And thanks for your question and that's a great question. This time last year, we had a very strong Q4, and we came out of the year and quite honestly, depleted the pipeline and spent most of 2013 rebuilding our pipeline, which meant establishing a marketing presence, a marketing organization, rebuilding the sales team and expanding that footprint. I'm happy to tell you that the pipeline grew significantly many times over throughout the course of the year. And even though we did close almost $10 million of contracts coming out of Q4, the pipeline did not go down. So we're -- we actually have stronger pipeline today than we did when we came out of December 31.

Jeffrey Van Rhee - Craig-Hallum Capital Group LLC, Research Division

Okay. And then, if you would, just along those lines, talk to me about the sales organization, I know you've made a lot of changes, you've changed a lot of heads. Just give me a sense of where we are now, direct rep-wise. A little color on what drove the strength in the bookings in the quarter, particularly with some color around partner influence? If you could fill those in, that would be great.

Sherman L. Black

Yes. In terms of just the footprint, it was a combination of rebuilding. Meaning, changing out some folks that better fit what we were trying to do as well as expanding the footprint. Today, we've got about 24 quota-carrying reps. Across the world, a little over 1 dozen in the Americas and then the rest are split between EMEA and APAC, with EMEA a little more heavily weighted. As far as -- what was your -- oh, you had another question there, I guess...

Jeffrey Van Rhee - Craig-Hallum Capital Group LLC, Research Division

About the channel -- just partner influence...

Sherman L. Black

Yes, our channel, I'd say we're -- we have definitely progressed in terms of the relationships throughout the course of 2013. The second half of the year, we saw a significant pickup in terms of the quality of the engagement. But we're still closing deals on a one-to-one basis, but that will change in 2014, as we'll see our channel contribute.

Jeffrey Van Rhee - Craig-Hallum Capital Group LLC, Research Division

How has the competitive landscape changed?

Sherman L. Black

I think it continues to evolve. We still see most of the same list of characters. I'd say the positive thing is they're saying a lot of the same things that we've been saying for the last year, in terms of how they describe the market and they position the value proposition. I still think we have the same differentiating features around delivery, technology and enterprise integration. I think our mobile apps exceed what these guys can do as well. And then our hybrid cloud, I think really provides a lot of differentiation. The other thing I've seen in the competitive space is acquisitions they're making -- I've seen some of them make acquisitions actually outside the Enterprise space. We've seen a couple of the -- one of the venture firms that we compete with on a day-to-day basis. They went through a big capital raise. And so, for our investors, I would say that, that should give you confidence about what I've been saying about this market, which is that the market is happening. People are adopting video and the enterprise, and it's attracting a lot of investment. The thing I feel good about is we have a team that's been focused on the Enterprise since Day 1 and I think we've got the differentiation there to have a really fantastic year.

Jeffrey Van Rhee - Craig-Hallum Capital Group LLC, Research Division

Got it. Just a couple of more for me, then I'll let somebody else jump on. On the bookings front, can you give me the bookings mix in the quarter, cloud versus prem and then just a sense of how you think, based on pipeline, it's going to look in the forward year, understanding it could vary widely?

James R. Stewart

Yes, Jeff, this is Jim. Say our mix of bookings is still primarily perpetual license term-type deals, maintenance and services. We still have a pretty minimal impact in terms of the actual deals we're doing with cloud customers at this point. We are growing the pipeline of those opportunities, but in terms of those cloud deals being a big part of our bookings, at this point, that's still a growing part of what we're doing.

Sherman L. Black

Yes, and Jeff, this is Sherman. I would add to that, in fact, we're so confident of that, that we've actually really started making investments in that area around cloud operation. It actually impacted our gross margins, I think, in Q4. Jim commented on the pipeline. That's gone from being able to count them on 2 hands to now you need more than 2 hands. I'll just put it that way. We've got close to 1 dozen POCs that are underway. And the great thing about the cloud deals is the deployments are quick, the POCs are not that invasive, and quite honestly, less expensive for us to do them. And they're able to get in and grab departmental level deals, which is smaller in size. But I think the other thing about cloud that we're seeing, Jeff, that I'm really excited about, is our hybrid offering. Where they're putting our BCC in the cloud and then using our Edge network on-premise across large enterprises. I think that's a really unique capability we have and expect to see, in 2014, that hybrid cloud is a big part of our offering. We're still going to go after the departmental deals, the land and expand opportunities that are pure cloud plays, multi-tendency type plays. But right now, we're sweeping up both of them. We're not limiting ourselves to one versus the other.

Jeffrey Van Rhee - Craig-Hallum Capital Group LLC, Research Division

And last one for me then, the cash burn, you came in and obviously had a very strong quarter here in Q4. Got you the cash generation. You're looking for cash burn single digits. And let's just assume that's a midpoint, maybe $5 million burn. Can you help me, in terms of software versus hardware, where the incremental, let's say, $7 million in cash burn in the forward year versus trailing is coming from?

James R. Stewart

Sure, Jeff. In terms of cash generation for 2010, the disc publishing business generated close to $10 million of cash flow for the year. And we expect strong cash generation in 2014 from that part of the business as well. And so I think if you kind of do the math of an expected decline in disc publishing revenues and the cash flow that, that's going to generate -- the difference is going to be what the software business is going to use in 2014.


[Operator Instructions] And we have a follow-up question from Jeff Van Rhee with Craig-Hallum.

Jeffrey Van Rhee - Craig-Hallum Capital Group LLC, Research Division

Yes -- no, I think I'm all set, guys. Just stepping back for one second, to the previous question, I just want to make sure I have it clear, in terms of the bookings. I don't know if you finished the second part of the question. You talked a little bit about you'll have -- you've got this hybrid offering and a number of other things. But in terms of the bookings number, can you just narrow that down to what was cloud and what you think will be prem, even within wide ranges? Or you're just not able to quantify that at this point?

James R. Stewart

Yes, Jeff, we're not breaking it out at that degree at this point.


I'm showing we have no further questions at this time. Please continue with any closing remarks.

Sherman L. Black

All right. Thank you, operator. And thank you, everybody, for joining us today. Jim and I are obviously available to answer any follow-up questions you may have. You guys know how to get a hold of us. We welcome your calls. And we look forward to updating you on our next quarterly conference call in April. Thank you very much.


Ladies and gentlemen, this does conclude our conference for today. We thank you for your participation and you may now disconnect.

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