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YuMe, Inc. (NYSE:YUME)

Q1 2014 Earnings Conference Call

May 13, 2014 4:30 PM ET

Executives

Gary Fuges – VP, IR

Jayant Kadambi – Co-Founder and CEO

Tim Laehy – CFO

Analysts

Kerry Rice – Needham & Company

Gene Munster – Piper Jaffray

Mark May – Citigroup

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the YuMe First Quarter Fiscal Year 2014 Earnings 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, May, 13, 2014.

I would now like to turn the conference over to Gary Fuges, Vice President of Investor Relations. Please go ahead.

Gary Fuges

Thank you. Good afternoon and welcome to YuMe’s first quarter 2014 financial results conference call. Joining me on the call today are Jayant Kadambi, Chief Executive Officer; and Tim Laehy, Chief Financial Officer.

This call contains predictions, estimates and other information that might be considered forward-looking statements. Such forward-looking statements involve various known and unknown risks and uncertainties. Actual results may differ materially from the results and timing expressed or implied by such forward-looking statements. Reported results should not be considered an indication of future performance. We make these statements as of May 13, 2014 and YuMe undertakes no obligation to update any forward-looking statements.

We refer you to our SEC filings for discussion of important factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements, including the section titled Risk Factors in our Quarterly Report on Form 10-Q for the quarter ended December 31, 2013 that has been filed with the SEC and in our future filings and reports with the SEC including our Form 10-Q for the quarter ended March 31, 2014.

Also I’d like to remind you that during the course of this conference call, we will discuss both GAAP and non-GAAP measures in talking about the company’s performance. Reconciliations of non-GAAP financial measures to the most directly comparable GAAP financial measures are provided in the press release.

And with that, I’ll turn the call over to Mr. Jayant Kadambi, Chairman and Chief Executive Officer of YuMe. Jayant?

Jayant Kadambi

Thank you, and good afternoon. I’ll start with some high level comments about our Q1 results. Tim will then review the Q1 numbers in greater detail, and then I’ll complete our prepared remarks with an update on our financial outlook and our 2014 strategic initiatives. We’ll then take your questions.

Q1 revenue of $37.3 million increased 40% year-over-year. We saw strong growth across the board with U.S. revenue increasing 34% and international revenue doubling year-over-year. We also continued to see growth in multi-screen campaigns as well as we generated about one quarter of our Q1 revenue from non-web based platform with mobile and connected television in particular being of increased strategic importance.

We believe that our end-to-end multi-platform ecosystem and data sciences capabilities allow us to serve our advertisers brand performance and safety needs. YuMe’s video offering complements advertisers’ TV spend, while also providing a measure of brand safety that cannot be provided by existing DR based display ecosystem.

Q1’s adjusted EBITDA loss was $2.7 million, primarily due to our strong revenue growth and our continued gross margin performance. Gross margin expanded 60 basis points year-over-year to about 46% driven again by our PQI Inventory Quality Scoring Algorithm.

Based on our Q1 performance and outlook, we remain confident in the fundamentals of the business. We reiterated our full year 2014 outlook in today’s press release. As we’ve mentioned in prior calls, we focus more on annual revenue trends as campaign start and end dates do not necessarily follow the timing of calendar quarter.

Based on our Q1 performance and outlook, we expect to generate about 40% of our 2014 revenues in the first half the year which is consistent with the first half revenue seasonality we saw in both 2012 and 2013. In addition to strong financial performance, Q1 included a number of business highlights.

First and foremost, on March 10 we launched Video Reach, the initial phase of our programmatic offering. Video Reach is built on top of our existing platform and enables us to participate in the budgets flow into agency and advertiser trading desk.

Through Video Reach, agency trading desks can leverage YuMe’s unique audience theater capabilities and brand safe multi-screen SDK traffic relationships on an automated basis.

We believe no other programmatic video solution allows trading desks to deliver TV like campaigns in a brand safe environment across all digital screens. We have been leaders in the brand safety arena starting with introduction of proactive safety mechanisms in video advertising several years ago.

With the migration of TV dollars to digital, along with the recent headlines, illustrating the brand safety issues and other legacy advertising mechanisms used to support video advertising, the importance of brand safety is increasing.

While it’s early we’ve seen good traction with the offering, we have built the programmatic interfaces within our existing offerings and we’ve received interest from many of the major trading guys.

We will provide an update on our continued progress on future calls, but I’d like to emphasize that we remain conservative in modeling Video Reach’s revenue contribution in our 2014 outlook. Let me take a moment to reiterate our programmatic related strategic initiatives.

Our initial focus is on the brand video spending deployed through trading desks which we continue to believe as complementary to the spending captured through the direct sales model. Video Reach is built for this purpose.

We also remain committed to expanding our programmatic capabilities to support both trading desk integrations as well as programmatic third-party inventory sources. In addition to our Video Reach launch, we extended our thought leadership in the market through events and published research that highlighted many of our key differentiators.

First-party data through optimization around branding metrics and the positive impact of driving campaigns across multiple screens. In March, we held Partner Day events in London and San Francisco, which brought together publishers, partners and clients to discuss industry trends in a panel format.

Key themes that came out of the events reinforced YuMe’s competitive differentiation in the marketplace such as the importance of first-party data, the increased focus brand advertisers have on engagement and frequency metrics compared to traditional metrics like – and the recommendation for publishes to focus on mobile platforms and connected televisions.

We also published two research reports that emphasize the importance of multi-screen viewing to the digital ecosystem. Our connected TV best practices study was conducted in partnership with Razorfish and Frank N. Magid Associates and included participation from leading brand advertisers like Best Buy, Citi and Truvia.

The study’s finding included that advertisers should think TV first when building their creative, keeping their introductions simple and the content accessible. This is where our ability to develop and deliver custom ad creative help differentiate us from other providers who don’t have the same access to connected television traffic.

Finally, last week we announced our Fifth Annual Global Research Roadshow, which showcases extensive research produced with Nielsen that illustrates the positive impact of multi-screen reach on brand recall. The event kicked off in Los Angeles on May 6 and will hit 13 U.S. and European cities from now until early June.

Together with Nielsen, we built a unique database of U.S. multi-screen ownership and usage patterns which shows that device fragmentation continues to accelerate. More importantly, the research shows that digital video campaigns that run across multiple devices enjoyed better brand recall.

In other words, the frequency quality of a campaign improves its consumers view the ad across multiple screens. And no other provider is better positioned to help advertisers achieve multi-screen frequency quality for their campaigns than we are.

We will leverage this database to build a tool that measures the reach impact from shifting TV dollars to multiple digital screens. We call it the reach calculator and we invite you to experiment with it at www.yumecalculator.com. We also plan to host a webcast this quarter, to allow investors to see the global research roadshow presentation. Please stay tuned for further details.

In summary, Q1 was a very strong start to 2014 with good year-over-year revenue growth, sustained gross margin, and the launch of our first-stage of our programmatic offering. We accomplished all of this while extending our product leadership in multi-screen brand video advertising. We believe the outlook remains strong and we are reiterating our full year guidance.

I’d like to turn the call over to Tim, who will discuss Q1 performance in greater detail. As mentioned in today’s press release, Tim will be stepping down as Chief Financial Officer later this month. I would like to thank Tim for all of his work over the last three years among – last three years, among other things, Tim has built a strong and deep financial condition and then help lead YuMe successfully through our IPO.

The board and I appreciate Tim’s contributions to YuMe and we wish him continued success. Upon Tim’s departure, Tony Carvalho will take over as Acting CFO. Tony joined us as VP of Finance in March of 2013. He has deep financial accounting and managerial experience including with companies like PayPal Service Stores and Zoom. And we are thrilled to have him take the helm while we will search for a permanent CFO.

I have no doubt that Tim and Tony will execute a seamless transition and I have every confidence in Tony’s ability to hit the ground running. With that, I’ll turn the call over to Tim for more details on Q1. Tim?

Tim Laehy

Thank you, Jayant. Before I discuss the Q1 results, I’d like to make a brief comment about my decision to step-down as CFO. Over the last three years, we built a strong and deep finance organization from the top-down.

The time is right for me to return to my passion of working with an earlier stage growth opportunity which an area I had pursued in a number of occasions during my career. This new opportunity is not competitive with YuMe and I wish Jayant and the entire YuMe team continued success going forward.

As Jayant previously mentioned, Tony Carvalho will be taking over as Interim CFO. I hired Tony last March because of his experience and his leadership skills and I am confident in his ability to oversee the accounting and finance organizations.

With that, I’ll now turn to the Q1 results. As Jayant mentioned, Q1 revenue increased 40% year-over-year to $37.3 million. Q1 saw a year-over-year growth in both the number of advertisers and the average spend per advertising customer. We worked with 351 advertisers in the quarter, an increase of 37% year-over-year, which is driven by both U.S. and international customer growth.

Average spend per advertiser increased 3% year-over-year to $104,000. In Q1, our top-20 advertisers accounted for 45% of revenue compared to 56% of revenue in the year ago period which illustrates increasing diversity in our revenue base.

For the last 12 months ended March 31, we worked with 634 advertisers, an increase of 27% from the comparable year ago period. Average revenue per advertising customer was $234,000, compared to $243,000 in the year ago period. We continue to expect growth our customer base to be one of the primary drivers of revenue in the short-term.

Gross margin of 45.9% increased 60 basis points year-over-year which reflects the continued positive impact of our PQI inventory quality scoring algorithm. Total operating expenses for the quarter increased 45% year-over-year as we continue to invest in our future growth.

Specifically we continued to invest in our U.S. and international sales organizations, our data science teams and our G&A infrastructure to support the company as it scales. Our adjusted EBITDA loss was $2.7 million in Q1, which was driven primarily by our strong revenue growth and healthy gross margin profile.

Our net loss per share was $0.16 in the quarter compared to a net loss of $0.69 per share in the year ago period. Our balance sheet remains strong with $58.7 million in cash and cash equivalents, and no debt as of March 31.

In summary, Q1 was a strong start to the year and with that, I’ll turn the call back over to Jayant.

Jayant Kadambi

Thank you, Tim. I will now review our Q2 and full year outlook. For the second quarter we expect revenue to be in the range of $40 million to $42 million. We anticipate Q2 adjusted EBITDA to be in the range of negative $4 million to negative $2 million, which reflects our ongoing investments in product engineering and international expansion.

For the full year of 2014, we continue to expect revenue to be in the range of $190 million to $200 million. Based on our actual Q1 results and our Q2 revenue outlook, first half revenue is expected to account for approximately 40% of 2014’s total revenue which is consistent with historical trends from 2012 and 2013.

We continue to anticipate adjusted EBITDA for the full year to be in the range of $2 million to $8 million.

Based on our outlook, we expect 2014 to be our third consecutive year of adjusted EBITDA profitability illustrating how we’ve proven the model while generating significant growth. We will remain focused on achieving our long-term operating model of 18% to 22% adjusted EBITDA margin.

Before we take your questions, I’d like to provide a status update on our international expansion and product enhancement initiatives. Regarding international, we remain on track with our plan.

In Latin America, specifically, we completed Phase one of our hiring in Miami and Mexico City offices and we are already seeing early traction in this new market. On the product front, we enhanced our data sciences and campaign targeting capabilities.

In addition, we improved upon our data gathering capabilities with the SDK and we are moving towards a more automated process in propagating the SDK across multiple screens.

We also further enhanced our audience segmentation processes and our household targeting capabilities to better target our campaigns to drive better reach, frequency and attention.

Finally, we continue to differentiate in the areas of viewability and brand safety. Our SDK approach not only drives unique data signal, but also allows us to manage viewability proactively as the campaign is being delivered. This is a great competitive advantage.

As many alternatives assess the viewability on a post-campaign basis. Our SDK combined with our active management of traffic relationships, provides a controlled end-to-end ecosystem that is unique and its ability to provide a brand safe environment for our customers.

This combination of technology and duration gives us a leadership position in these key areas of concern for brand advertisers and it extends into mobile and connected television screens.

The technology and the model are built with brand news in mind and we believe this focus is becoming a more important differentiator as advertisers who use this play-based advertising technique to risk having less transparency into where their ads can run.

So overall, Q1 was strong across the board and sets a good turn for 2014. We are executing on our financial metrics while investing in the business to capitalize on our long-term secular growth opportunity in the industry. We continue to have confidence in the business and believe that YuMe’s fundamentals remain strong. Thank you for your attention. We will now take your questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) Our first question is from the line of Kerry Rice with Needham & Company. Please go ahead.

Kerry Rice – Needham & Company

Thank you. Just a couple of questions. One, I was hoping to get a better understanding when you look at the trailing 12 months and the decrease of about 4% in average revenue per customer. Is that just the seasonality issue that impacted by the number of customers you added.

Does that seem to be a little bit higher. You can put some color around that. And then, around the split in the first and the second half, you had mentioned the guidance for Q2 about 40% of revenue falls in the first half and that was consistent with the 2013?

Is there any acceleration there that we should think about for the second half in general that things just kind of generally are being pushed to the second half of the year, maybe industry-wide or on the video side versus the first half?

Jayant Kadambi

Hi, Kerry, how are you doing?

Kerry Rice – Needham & Company

Hey, Jayant.

Jayant Kadambi

So, two questions, trailing 12 months 4% decrease in advertisers, I think, our advertiser growth as you can see is very healthy and I think we’ve talked before about this industry being very nascent in advertisers.

Especially, on the TV side being conservative and moving from small spending to very, very large spending takes some time and so the advertiser growth and from a campaign perspective it’s just – is larger than the rate at which they are growing from the left-hand side or the small side of the funnel to the large side of the funnel in terms of spend.

So, especially, at the beginning of the year, so, I wouldn’t read too much into it other than the fact that the business is healthy in terms of getting customers and revenue being spent.

On the 40% split and acceleration question into the second half of the year, we have been quite conservative in the sense that we are not providing any information yet to all of you as to what revenue acceleration would be based on other businesses with such as Video Reach that we are entering.

We are still testing it and so that we had a rough information to provide you guidance. I wouldn’t – what you should y read into the 40% comment that I made was simply, if you look at the last two years of our history, having ended up at the growth rates that we ended up with at the end of the year.

We see this year to be very consistent on the first half basis, right? As I had said before, our business is lumpier than all of you would like from a percentage basis and given the numbers we are talking about $30 million, $40 million, $50 million, a $1 million move of a campaign affect the percentage points a lot more from a sort of – if you just eyeball lid perspective then I wouldn’t read too much into it.

We don’t see acceleration of the business outside of the phenomenon we’ve talked about in the last two, I’d say six weeks of Q4. Other than that, we don’t see any real acceleration on a nominal basis unless we enter new markets and hopefully at the next call or the call after that we will be able to provide meaningful information about any systemic growth acceleration.

Kerry Rice – Needham & Company

Great. Thank you very much.

Operator

Our next question is from the line of Gene Munster with Piper Jaffray. Please go ahead.’

Gene Munster – Piper Jaffray

Hey, good afternoon. Jayant, a question regarding the programmatic side, you are doing obviously the right thing by keeping the expectations in check, but they need to go there as far as at what point this could be something that’s more measurable and maybe just from a high level.

Is it’s something in 2015, is it 2016, I guess, from the first question, and maybe second not related to revenue, but you mentioned some exchanges are looking at that's the exact word to use, but what point do you think we could actually see some sign up? And then I have a follow-up question.

Jayant Kadambi

Sure, so, I think, we’ve been fairly consistent, so I’ll reiterate that, now, we think this is late second half of the year, if we are going to offer any material change to the guidance and we continue to feel good about the guidance based on our current business model.

We continue to think that, the additional sources of revenue will alter that and we think it’s sort of the end of the year and then continuing into 2015. So it’s definitely not a 2016 thing and we think it’s earlier than 2015.

In terms of programmatic, I want to make sure I understood the question, Gene. Was your question, when we will hook up our programmatic solution to other inventory sources or other demand sources?

Gene Munster – Piper Jaffray

Yes, both.

Jayant Kadambi

Okay, so, I’ll start with inventory sources. As we’ve said, fairly consistently, we believe that the brand advertisers require things slightly different in terms of ecosystem infrastructures than currently exist in the display and performance-based ecosystem. We think the data that we add, we think that cookie that’s targeting, we think the brand safety that we’ve been doing for more few years, now for quite a long time is all key as part of the package.

So, we’ll hook up to other inventory sources when we – do it and I said it my prepared remarks in the last we just want to make sure that we get all the data we need, so that we can provide our advertisers what you want.

And we get all the safety requirements that are sort of part and parcel of our current business and while we have got the third-party sources. On the demand side, we are actively hooking up to the demand side now. So, that's the process that’s ongoing now and we will go through the remainder of Q2 and Q3.

Gene Munster – Piper Jaffray

Thank and my follow-up question is regarding, sorry, is regarding the sales force – how many sales people you have and what the trend is, or any expectations about growing that number and that’d be helpful? Thank you

Jayant Kadambi

Yes, I’ll talk generally about that. We have headcount at the end of Q1, it was about 478 or 480 people which is up 34% year-over-year. I think it was 357 or so in Q1 of 2013.

We don’t break out headcount by function, but we can say that the year-over-year sales force growth is slightly higher than the total headcount growth which accounts for our growth internationally mostly. So we probably grew 40%, 50% a year on sales force headcount.

Gene Munster – Piper Jaffray

Great, that’s helpful. Thank you.

Operator

(Operator Instructions) Our next question is from the line of Mark May with Citi. Please go ahead.

Mark May – Citigroup

Hey, guys. Thanks for taking my questions. A question on ARPU. I believe it was up around 3% year-on-year. I wondered if you could provide any color around the churns on a same customer basis, if there any sense you can give us what ARPU is on that basis.

And then the R&D spend in the quarter, I think it was less than $1 million, if you could just talk about how you are able to continue to innovate on the product side with such efficiency on the R&D line that will be helpful and I had one other follow-up?

Jayant Kadambi

Sure, I think our average revenue per advertising customer was still somewhere around $100,000 specifically, $104,000 and it increased 3% from Q1 of 2013 when it was just over $100,000. So, it’s a 3%, 4% increase. Similar to the question from Kerry, I think the growth in advertising customers is overshadowing the ability for these customers to move into large spending and it’s too early. So that’s the trend you are seeing.

On R&D, I think, we continue to be very, very aggressive about using labor overseas. And as you know, we have – we maintain operations in India that are fairly strong and significant and we continue to hire in India very aggressively, primarily because that’s where we are able to acquire a very high quality talent.

And we’ve opened new offices in Pune, India which joins our Chennai office and this does gives us a – continues to give us a longstanding advantage in R&D on a systemic basis. We are heavily investing in R&D talent. I think we hired over – in total technology we hired about 20 people in Q1, you will see that accelerate into Q2 and Q3 and we feel good about where we are.

Mark May – Citigroup

Okay, great. And then I believe that your sales – sales expense growth has been greater than your revenue growth for a few quarters. I am just wondering it, what should we be thinking in terms of when you start to – that starts to flip and we see the productivity gains from some of the recent sales hires including internationally and elsewhere kind of catch up such that that ratio flips. What’s your thinking there?

Jayant Kadambi

So, we continue to aggressively invest overseas in sales and marketing. We think that the timing is good now to continue to grow and while as you’ve seen, we’ve maintained pretty decent fiscal discipline throughout our growth.

I think from a timeframe perspective, I think it will be into 2015 before you see us temp down on sales growth, because there is a few markets that we need to get into. I’d say you’ll see that trend continue through Q3, Q4 before it – at the very least before it starts to normalize.

From a long-term operating outlook, I think we’ve given long-term operating outlook of 18% to 22% EBITDA and the dampening sort of the normalizing of sales and marketing spend in addition to business development spend in the three to five year horizon and we are still comfortable with that.

Mark May – Citigroup

Okay, thanks.

Operator

(Operator Instructions) At this time, there are no further questions in queue. I’d like to turn the call back over for closing remarks.

Jayant Kadambi

Thank you again for your interest in YuMe. 2014 is off to a good start with our Q1 results and the Video Reach launch and we remain confident in the fundamentals of our industry and our business. Industry research conducted by YuMe and others show that the digital video space is a huge market and video consumption continues to grow in segments across, mobile, tablet and connected television screens.

We believe YuMe is uniquely positioned to help brand advertisers capitalize on these secular growth trends. We drive incremental reach in frequency with attentive video audiences across all screen categories and we target audiences with our cookies and in a brand safe environment.

We can deliver these results in this manner because, we built the technology platforms, data sciences expertise and end-to-end ecosystem that serves the specific needs of TV advertisers within digital video.

We think these differentiators put us in a very strong position to take advantage of the market opportunity in front of us. We look forward to seeing you at upcoming investor conferences and appreciate your continued support. Have a good afternoon.

Operator

Thank you. Ladies and gentlemen, this does conclude our conference for today. If you’d like to listen to a replay of today’s conference please dial (303) 590-3030 or 1 (800) 406-7325 and enter the access code of 4680477. Again we’d like to thank you for your participation. And you may now disconnect.

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