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Envivio, Inc. (NASDAQ:ENVI)

F4Q 2014 Earnings Conference Call

March 20, 2014 5:00 PM ET

Executives

Alice Kousoum – IR, The Blueshirt Group

Julien Signès – President, CEO and co-Founder

Erik Miller – CFO

Analysts

Scott Butler – Catalyst Research

Michael Lin – Stifel, Nicolaus & Co., Inc.

William D. Morrison – Oppenheimer & Co., Inc.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Envivio Fourth 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 questions. (Operator Instructions) This conference is being recorded today, March 20, 2014.

I would now like to turn the conference over to Alice Kousoum with Investor Relations. Please go ahead.

Alice Kousoum

Thank you, Douglas. Good afternoon and welcome to Envivio’s fourth quarter and fiscal year 2014 financial results conference call. Joining the call today are Julien Signès, President and CEO; and Erik Miller, CFO. The agenda for today’s call includes commentary from Julien, followed by discussion of the financial results from Erik.

This afternoon, Envivio issued a press release announcing its fourth quarter and fiscal year 2014 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 for at least three months following this call.

During the course of today’s call, Julien and Erik will make projections, estimates and other forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 as amended, including statements about Envivio’s overall business outlook, anticipated future financial and operating results such as revenue, gross margin and operating expense and operational and strategic plans. We caution you that such 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 from time to time on Envivio’s annual report on Form 10-K, quarterly reports on Form 10-Q and other periodic filings 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 this 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 to the earnings release on Envivio’s website.

And now, I’d like to introduce Julien Signès.

Julien Signès

Thank you. Joining me on today’s call is Erik Miller, Envivio’s Chief Financial Officer. We are pleased with our fourth quarter performance with revenue of $12.5 million, up 7% sequentially and 62% year-over-year.

For our full fiscal year 2014 revenue of $43.2 million, was up 10% year-over-year. The solid year-over-year revenue growth, particularly strong for the fourth quarter, was due in part to the performance of our sales organization and their focus on Tier 1 engagement.

Comcast, an existing Tier 1 U.S. cable customer contributed 22% of revenue in the fourth quarter and 18% of revenue in fiscal 2014. This is a good example of a Tier 1 customer win, with initial deployment beginning in the second quarter in fiscal 2014 followed by expansions throughout the year.

During the fourth quarter, we continued to strengthen our sales effort in North America by hiring a salesperson focused on the opportunities with the Tier 1 satellite and telco service provider market.

We believe there are many potential Tier 1 opportunities for Envivio and we are encouraged by the level of engagement we are involved in. Also, contributing to our fourth quarter result was strong performance from our international sales region.

In Q4, EMEA and APAC comprised 68% of total revenue, up from 61% in the prior quarter. We won several projects internationally, which I will discuss in more detail shortly.

Our technology leadership and continued investment in our multi-screen encoding solution drove Q4 revenue for our Muse and 4Caster products to $7.1 million in the fourth quarter, up 60% year-over-year. We also saw growth in our Halo product sales revenue, up over 300% from the year ago quarter. We continue to invest in enhancing compression performance and driving density improvement for Muse, while adding advanced features on the Halo platform.

Now, turning to some of our partner and customer highlights for the fourth quarter. In APAC, our Muse and Halo products were deployed by Omni for live streaming and premium content as part of the new blink TV service in the Philippines. The recently launched service is the first nation-wide OTT video service in the Philippines, providing premium content for viewing on PCs, tablets and mobile phones.

In Europe, Irdeto, a leading provider of multiscreen, media protection and revenue assurance solutions announced a new partnership with Envivio and Microsoft designed to better enable operators to stream live channels over-the-top to multi-screen platforms and devices. The joint solution is being deployed in the market with a Tier 1 European cable operator.

In Q4, we won our first software-only project for deployment in the data center in Europe at a Tier 1 cable operator with presence in multiple countries. This end-to-end multi-screen video processing solution, including Muse encoders, Halo network media processors and Guru network management system.

Envivio transcoding technology is being used for multiple white label TV services in Europe, including Vision247’s, Perception mobile service deployed by Slovenian service provider T-2, as well as Telekom Slovenije’s white-label OTT solution for operators and media companies based on its TViN platform.

In Latin America, we won our first two head-ends for traditional cable TV. I’ve discussed in previous quarters, it is part of our strategy to expand our footprint, to include delivery of TV on any screen, including traditional linear broadcast services.

We continue to invest in our solutions. In the fourth quarter we introduced Envivio Guru 4.0, an enhanced version of our network management system. Guru 4.0 includes a new and improved user interface, as well as tools such as enhanced monitoring, connectivity enhancements, device auto-discovery and scheduled service control. These new features simplify video network management and facilitate greater service automation.

We believe there is a growing customer interest in advanced video delivery solution. This week in London, at TV Connect 2014, BSkyB's online Pay TV service, NOW TV, was featured at the Envivio booth. NOW TV offers subscribers in the U.K. a flexible, high quality video experience on any device. This service is an excellent example of how an operator can deploy a multi-screen TV service to increase monetization by reaching customers who are interested in viewing live or on-demand content without a full pay TV service subscription.

In fact, BSkyB reported in January in its financial result that strong growth for its on demand services and mobile app grew revenue and subscriber growth.

We have collaborated with value centric key partners such as Broadcom, MStar and STMicroelectronics to demonstrate 4K Ultra HD technology at industry events including CES in January and again with STMicroelectronics this week at CCBN, a key regional event for the China market.

Also, this week at TV Connect 2014 Envivio and AirTies Wireless Networks, a leading supplier of advanced wireless and OTT/IPTV technologies to the broadcast and broadband industry together with Octoshape, an industry leader in cloud-based OTT streaming technology demonstrated interoperability of HEVC adaptive bitrate video delivered over the public Internet to consumer set-top boxes.

HEVC is a new critical enabling technology that promises up to 50% bandwidth reduction, thus significantly reducing the cost of delivery of the existing video services. HEVC is also a key enabler for the delivery of 4K Ultra HD services.

At the upcoming NAB show in Las Vegas, the industry’s most important North America event of the year, we plan to introduce new key technologies and solution that further demonstrate our innovation.

In addition to 4K Ultra HD, we will highlight a new cloud-based video processing offering that allows operator to virtualize software for head-ends in the data center as well as an end-to-end cloud TV solution.

We also showcase our solution for Personal TV and targeted ad insertion. These solutions are designed to address critical needs for operators to be able to further enhance and personalize the user experience as well as improve operations and time to market by implementing cloud-based video processing.

We are pleased with our results in the fourth quarter and in the full fiscal year 2014.

The continued execution by our worldwide sales organization contributed to our strong revenue growth versus prior year period. We believe our software-based strategy and our investment in maintaining our technology leadership will lead us back to profitability in these growing markets.

Let me now turn the call over to Erik Miller to discuss the quarter in more detail.

Erik Miller

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 in our earnings release and can also be found in the Investor Relation section of envivio.com.

Let me now discuss the results of the fourth quarter and full fiscal year 2014 in more detail. Revenue for the fourth quarter was $12.5 million, compared to $11.7 million in the prior quarter and $7.7 million in the fourth quarter of fiscal 2013. The revenue improvement was the result of solid field execution across all geographic regions.

For fiscal 2014 revenues were $43.2 million, compared to $39.1 million last year. The higher revenues for the year primarily resulted from the ongoing improvement in our sales team performance, growing acceptance of software-based solutions and improving market demand.

In the fourth quarter our revenue from the Americas was $4 million, compared to $4.6 million in the prior quarter and $1 million in the fourth quarter of the prior year. For the full year revenue in the Americas was $17.4 million, compared to $8.3 million in fiscal 2013. The significant year-over-year increase was principally as a result of our improved sales coverage in North America, which resulted in large orders received within the year from leading Tier 1 U.S service providers.

Our revenue in EMEA for the fourth quarter was $4.9 million, compared to $4 million sequentially and $4.4 million in the prior year. For the full year EMEA revenue was $15.6 million, compared to $19.9 million in fiscal 2013. The year-over-year decrease was principally due to the macroeconomic environment in Western Europe, which remains challenging.

Our revenue in Asia-Pacific in the fourth quarter was $3.6 million, compared to $3.1 million sequentially and $2.3 million in the prior year. For the full year Asia-Pacific revenue was $10.2 million, compared to $10.9 million in the prior year.

Our gross margin percentage for the fourth quarter was 66.8% compared to 65.2% in Q3 and 58.6% in Q4 of last year. Non-GAAP gross margins for these periods are the same as GAAP. For the full year gross margin was 66.2% compared to 61.7% in fiscal 2013. We saw an increase in gross margins for the quarter and the year due to higher software revenues in North America. As we mentioned before we expect gross margin percentage to fluctuate based on product mix and geographic area of sales.

Non-GAAP operating expenses for the fourth quarter of fiscal 2014 were $9.5 million down slightly from the prior quarter and up from $8.6 million in the year ago quarter. For fiscal 2014 non-GAAP operating expenses were $38.1 million, compared to $37.9 million in fiscal 2013.

Non-GAAP R&D expenses for the quarter were $2.2 million, compared to $2.5 million in Q3 and $1.5 million in the year ago period. In the quarter, we increased our accrual for research tax credits from the French government, which reduced our R&D expenses by $400,000. Non-GAAP R&D expenses for fiscal 2014 were $9 million, compared to $7.5 million in fiscal 2013.

Non-GAAP sales and marketing expenses for the quarter were $4.7 million, compared to $4.9 million in Q3 and $4.6 million in the year ago period. Non-GAAP sales and marketing expenses for fiscal 2014 were $19.4 million, compared to $20.8 million in fiscal 2013.

Non-GAAP general and administrative expenses for the quarter were $2.6 million, compared to $2.5 million sequentially and $2.5 million in the year ago period. Including non-GAAP general and administrative expenses was a charge to bad debt expense of approximately $540,000. Non-GAAP general and administrative expenses for fiscal 2014 were $9.7 million, compared to $9.6 million in fiscal 2013.

Non-GAAP operating loss was $1.2 million, compared to a loss of $2.2 million in Q3 and a loss of $4.1 million in the prior year quarter. For the full year, non-GAAP operating loss was $9.5 million, compared to a loss of $13.7 million in the prior year. The quarter and full year improvement was principally from increasing revenues and margin expansion coupled with our ongoing efforts to control costs.

Stock-based compensation expense for the fourth quarter was $646,000, compared to $631,000 in Q3 and $721,000 in the prior year quarter. GAAP net loss for the fourth quarter was $2 million or a loss of $0.08 per share, compared to GAAP net loss of $2.9 million or a loss of $0.11 per share in Q3 and GAAP net loss of $4.9 million or $0.18 per share in the fourth quarter of last year.

For fiscal 2014, our GAAP net loss was $12.2 million or $0.45 per share. This compares with the GAAP net loss of $16.9 million or $0.72 per share for fiscal 2013. Non-GAAP loss for the fourth quarter was $1.4 million or a loss of $0.05 per share compared with non-GAAP net loss of $2.3 million in Q3 or a loss of $0.08 per share and non-GAAP net loss of $4.1 million or $0.15 per share in the fourth quarter of last year. For fiscal 2013, our non-GAAP net loss was $9.8 million or $0.36 per share. This compares with a non-GAAP net loss of $14.1 million or $0.60 per share for fiscal 2013.

Moving now to the balance sheet. Total assets at the end of the fourth quarter were $67.3 million, compared to $68.6 million at the end of Q3 and $72.4 million at the end of the fourth quarter and the year ago period. We ended the quarter with $47.9 million in cash, cash equivalents and short-term investments as compared to $49.9 million in cash, cash equivalents and short-term investments at the end of the third quarter of 2014. The sequential decrease was due primarily to the net operating loss for the quarter.

Our deferred revenue balance at quarter end was $6.7 million, compared to $7 million in Q3 and $4.7 million a year ago. The year-over-year increase reflects an increase in our sales of service-level agreements and commercial terms on some order shipped in the quarter.

Revenue from direct sales was 49% for the quarter, compared to 54% in the prior quarter and 37% a year ago. For fiscal 2014, revenue from direct sales was 54% compared to 31% at fiscal 2013. The fiscal year increase was primarily result of large orders we received this year from leading U.S. cable operators.

Our DSO for Q4 was 78 days, compared to 80 days in Q3 and 98 days in the year ago period. As mentioned before, we expect DSO to fluctuate based on geographic and customer mix.

Total inventory at the end of the fourth quarter was $75,000, compared to $412,000 in Q3 and $708,000 at the end of Q4 last year. We ended the quarter with a total headcount of 163, up from 156 from the prior quarter and 158 in the prior year quarter.

To recap, we are pleased to have ended the fiscal year with solid revenue growth in our international business and demonstrate a continuing strength in North America. We believe our revenue performance this year was as a result of our initiatives to improve sales coverage in North America and improvement to sales execution overall, and we continue to see increasing engagement with service provider customers around the world.

We remained cautious about our customer spending patterns. We can change from period to period and we continue to control our operating expenses. However, we are encouraged by the trends we are seeing in the market adoption of our software-based solutions for multi-screen.

With that we’ll now take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from the line of Scott Butler with Catalyst Research. Please go ahead.

Scott Butler – Catalyst Research

Hi, thank you. And congratulations Julien and Erik, looks like a nice quarter. I wanted to ask you about some of the consolidation activity in the cable service industry here at the U.S. And how much is this consolidation activity may be impacted the business during the quarter, at least what’s your read on that. And then how do you see it playing out going forward. I know there is a lot of, I guess you could term it, the deck chairs are getting shuffled a little bit, and how much is that played a role and maybe some of the dislocation, or discontinuity in the U.S. revenue in the quarter. And then I have a follow-up?

Julien Signès

Yes, so this is correct. There is a lot of movement in the service provider arena. The good news however is the major move is that Time Warner Cable, Comcast merger that’s still under discussion. The good news there is both are our customers and so we believe that the risk for the mid-term is very small because we are a leading providers in both of the operators. Obviously quarter-over-quarter there could be disruption at either waiting for some results so it can have a I would say a very short-term effect, but we feel that overall there’s no major impact for us because of our situation.

Scott Butler – Catalyst Research

Got it. Okay. And I was excited to hear about the first head-end, the broadcast TV head-end deployment in Latin America. Can you give us a little more color on that, maybe talk to us other opportunities that are [creating] [ph] in that area?

Julien Signès

Yes. Well, there is a ton of opportunities, as you know. Obviously there’s a $250 billion consumer pay TV market and so being able to address the existing market with a disruptive platform that enable operators to not only serve their current customer better, but increase the customer like BSkyB is doing with NOW TV is a very good value position. So we are moving quite aggressively in all regions towards the traditional pay TV market.

Our product is very competitive in that arena. We’ve completed the feature set that we mentioned over the last two quarters and we are obviously pleased to see some traction. We feel that there is many more opportunities in that category that will help us establish a seat if you want at all these operators, from which we can grow with our marketing technology and [head-end] [ph] technology et cetera. So it’s an important move for us and we’re pleased to see that initial traction.

Scott Butler – Catalyst Research

That’s great. Well, congratulations, and I’ll jump back in the queue. Thank you.

Julien Signès

Thank you.

Erik Miller

Thank you, Scott.

Operator

Thank you. Our next question is from the line of Michael Lin with Stifel. Please go ahead.

Michael Lin – Stifel, Nicolaus & Co., Inc.

Hi, yes. I had a question about investments going forward. Obviously you’ve dropped R&D down quarter-over-quarter from the previous quarters. I’m just kind of curious what your outlook is for investing in business going forward?

Erik Miller

Well, I can address that. The sequential drop was due to R&D tax credit. That was a one-off that offsets R&D expense for that period, but the base level of R&D spend has not been cut. It’s just the net effect that the French government subsidizing a bit more of their R&D efforts.

Michael Lin – Stifel, Nicolaus & Co., Inc.

Okay. So you probably expect to continue to investigate that kind of levels going forward or are there any plans to just realign cost or what’s sort of the thinking?

Erik Miller

We’ve been pretty clear and resolute that we believe we’re the technological leaders in the marketplace and it’s incumbent upon us to continue to invest in research and development to drive new products growth and also add more software products into our installed base, which ultimately drives gross margin expansion. So we will continue to make targeted investments within the umbrella being prudent of course with our overall cost.

Michael Lin – Stifel, Nicolaus & Co., Inc.

Okay. And following up on the HEVC codec, I was wondering is that a potential catalyst in the near-term growing feature for more sales, because obviously your customers will see better bandwidth utilization with that technology. I’m just trying to get a sense for how far along that technology is and sort of its lifecycle, when it could potentially be deployed in, sort of what sort of feedback have you heard from potential customers on adopting that codec?

Julien Signès

Yes, absolutely. So like you said, it’s actually a pretty major milestone for the video industry. When you look at the history, it only happened twice in the history of television and every time it happened it was a very big event. Obviously, so we went from analog to MPEG-2, 10 years later in early 2000 we went from MPEG-2 to MPEG-4. And now we are going from MPEG-4 to HEVC. Each time back of the envelop there has been the promise to increase performance by an order of magnitude of 50% [inaudible] may vary on type of content and the maturity of implementation.

But obviously these are very exciting things, when you think about it bandwidth is obviously a major OpEx or CapEx for people that have their own network component, if not the number one component, and therefore us being able to use that 30% can mean several key things. It can mean either I can improve my quality by, for example, launching 4K and higher resolutions and increasing my HD reach, or I can reduce my network cost on the same quality by anywhere from 30% to 50%.

So you can imagine this is obviously important. The caveat is obviously the decoding platform. You need the decoding platform to be up-to-date with HEVC decoding, which is a different algorithm. And obviously this is why it’s significant, all the recent announcement we’ve made with Broadcom, with STMicroelectronics and a few others that are leading the chipset for decoding those streams.

And as far as the timing goes, we think this year is the year of establishment and initial trials. So we may not see significant revenue yet this year. However, certainly we’re anticipating a strong transition into next year and every time that happens obviously that can trigger significant ways of purchasing because people are just transitioning their head-ends from either MPEG-2 or MPEG-4 into HEVC.

Michael Lin – Stifel, Nicolaus & Co., Inc.

Okay. Understood, great. Thank you.

Operator

(Operator Instructions) Our next question is from the line of William Morrison with Oppenheimer. Please go ahead.

William D. Morrison – Oppenheimer & Co., Inc.

Hi, guys. Couple of questions. Number one, you disclose your backlog during the year?

Erik Miller

No, we don’t as a rule disclose that.

William D. Morrison – Oppenheimer & Co., Inc.

Okay. Second question then, would be did you feel a little better than you did last quarter on the outlook, if you’re not going to disclose your backlog or about the same?

Julien Signès

Maybe I’ll take that. Yes, we feel increasingly better from obviously the last year into this year. So at a macro level, yes. Obviously, we remain cautious on a quarter-to-quarter performance because of spending patterns of our customers, but on the general outlook we remain positive, yes, and we think in general the pipeline and the engagements are increasing.

William D. Morrison – Oppenheimer & Co., Inc.

Good. And when would you expect Halo and ad insertion particularly to start contributing increasing portions of your revenue?

Julien Signès

Well, so that’s a great question. I mean we have several initiatives to diversify the revenue source beyond the news and procure as transcoding. So Halo is one major initiative that we started a year and a half ago. We’ll be somewhat disappointed with the – scaling so far has been relatively modest on a percentage basis, but it’s being steadily increasing as we’ve been noticing quarter-over-quarter metric at least. And so, generally I can report that there’s better adoption overall by the market for Halo.

With network PVR and adding insertion there are significant opportunities to increase the volume. Also Halo is now being deployed in what’s called just-in-time packaging, which applies for on demand deployment and packaging on-the-fly. So these can also have significant volume. So we are pushing Halo to participate into those new applications. Those who are not on the ad insertion, but in or PVR and just-in-time packaging equally are successful and I don’t have the full answer, but if we’re to go into this we certainly can see volumes of Halo increasing sharply. So at the moment we are still pursuing the opportunities we have in the pipeline. We haven’t closed any major business otherwise it would have been visible.

William D. Morrison – Oppenheimer & Co., Inc.

Okay, good. And last question, on that the cloud-based products that you’re going to announce, is this going after a different customer base like CDN type customers or would be it with your existing customers?

Julien Signès

Well, it’s actually a great question. Obviously we haven’t made a full disclosure of the offering. Obviously cloud is a very important evolution for us because more customers are interested in cloud delivery of video. So to answer shortly it’s both applicable to existing customer base as well as we believe increasing to more of the Tier-2 and Tier-3 and single content owner that want to get into the market-screen LTP space. So we believe it will be applicable to both populations, existing customers as well as a new breed of customers that we haven’t really targeted so far.

William D. Morrison – Oppenheimer & Co., Inc.

Great, all right. Thanks a lot, guys. Appreciate it

Julien Signès

Thank you.

Erik Miller

Thank you.

Operator

Thanks. At this time, I’d like to turn the call back over to Alice Kousoum for closing remarks.

Alice Kousoum

Thank you everyone for joining us on our call today and we look forward to speaking with you next quarter.

Operator

Ladies and gentlemen, that does conclude our conference for today. I would like to thank you for your participation and you may now disconnect.

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