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Envivio, Inc. (NASDAQ:ENVI)

Q1 2015 Earnings Conference Call

May 29, 2014 5:00 PM ET

Executives

Cynthia Hiponia - IR, The Blueshirt Group

Julien Signès - President, CEO and co-Founder

Erik Miller - CFO

Analysts

Mike Lin - Stifel Nicolaus

Operator

Good day ladies and gentlemen and thank you for standing by. Welcome to the Envivio First Quarter 2015 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, Thursday May 29, 2014.

And I would now like to turn the conference over to Cynthia Hiponia, Investor Relations. Please go ahead.

Cynthia Hiponia

Thank you, Katja. Good afternoon and welcome to Envivio’s first quarter of fiscal 2015 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 a discussion of financial results from Erik.

This afternoon, Envivio issued a press release announcing its first quarter fiscal 2015 financial results, which is available on the Company’s Web site at envivio.com. The call is being broadcast live over the Internet and the audio of this call will be available on the IR page of the Company’s Web site for at least three months following the 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 expenses 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 in 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 Web site at sec.gov. Envivio undertakes no obligation to confirm, update or revise the financial forecasts for the 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 Web site.

I’d now like to introduce Julien Signès.

Julien Signès

Thank you. Joining me on today’s call is Erik Miller, Envivio’s Chief Financial Officer. In the first quarter we generated revenue of 8.4 million up 13% year-over-year and down 33% sequentially. Our weak sequential revenue performance this quarter was due in part to typical seasonal decline in our business. As we have discussed in the past the first quarter is impacted by lower spending from our customers. Additionally further impacting our revenue performance this quarter we saw number of delayed orders from some of our North American service provider customers who are undergoing reorganization and consolidation.

Internationally we are also seeing some delays in spending, mostly resulting from budgetary delays and customer readiness and as a result some orders were pushed out into later quarters. While we remain cautious about our customer spending patterns which can change from period-to-period and have always been subject to risks, we remain confident that some revenue from these delayed orders will close in future quarters, in fact we have already seen some orders close in the second quarter.

We do not believe these have been any meaningful changes -- there have been any meaningful changes in the competitive environment and our win rates have remained consistent. Revenues for our Muse based product was up 31% year-over-year and revenue for our Halo product was up 12% year-over-year. Our gross margin in the quarter was 68% reflecting a higher proportion of software license orders from Tier 1 customers.

Now turning to some of our partner and customer highlights for the quarter, Comcast and existing Tier 1 U.S. cable customer contributed 29% of revenue in the first quarter. We are also encouraged by our level of engagement, with new potential Tier 1 customers as a result of our ongoing investments and focus on our North American service provider sales. We announced this quarter that our solutions powered premium live HD sports channels on Apple TV for a European Tier 1 service provider. The premium channels are compressed using Envivio Muse Live encoders then protected using a new encryption mode by Envivio Halo network media processors and delivered to Apple TV.

In the U.S. we also announced our Envivio Muse Encoding software now powers more than 10,000 live linear cable TV channels in a fully virtualized software environment, outputting nearly 33,000 live adaptive bit rate streams delivered to millions of subscribers for multi-screen video services. This deployment, the first and largest of this kind in the industry, was launched over the past 12 months at a leading Tier 1 U.S. cable operator, using VMware virtualization and Envivio video processing solutions.

In APAC, MediaCorp, Singapore’s leading media company has employed Envivio Muse to power the Toggle service serving over-the-top video servicing to viewers in Singapore. Toggle TV provides free local content and subscription-based premium channels to Internet-connected smartphones, tablets, PCs, set-top boxes and connected TVs, either as live or catch-up video assets.

We continue to invest in our market leading solutions to address the latest market trends. According to a report released by Gartner in early 2013, lower spending on public cloud services across all industry sectors is projecting to increase from 76.9 billion in 2010 to 210 billion in 2016. Service providers are adopting cloud technology for video infrastructure in the same way that they have been doing for the general IT services. Cloud video services bring an unprecedented level of efficiency and flexibility to service providers.

The proliferation of cloud-based video services helps operators stay competitive by facilitating ongoing expansion and technology migration while shortening time-to-market and minimizing costs. To address these trends, this quarter we announced the integration of our core software Envivio Muse encoders and Envivio Halo network media processors into open stack cloud software enabling them to operate in a virtualized environment.

We also announced a turnkey end-to-end hosting cloud video service. This fully integrated video delivery service significantly reduces time-to-market and cost by employing a pay as you grow model that allows content and service provider to scale the service with usage. The end-to-and service incorporates all the components needed to launch a premium OTT service including encoding, packaging, user rights management, billing, ad mediation, content delivery network, and app creation for mobile connected devices.

The new cloud service can significantly reduce time-to-market for customers who want to launch multi-screen services with minimal initial CapEx investment. We are particularly excited about this product introduction in this quarter as we believe we are addressing the need for new capabilities with an aggressive virtualization initiative and the introduction of a groundbreaking end-to-end hosting service.

At NAB Envivio launched a new multiprocessor softer approach for real-time 4K Ultra HD HEVC compression using Envivio Muse encoding software. Our Muse 4K was later awarded one of the industry’s most prestigious technology honors, NewBay Media’s Best of Show Awards. By distributing HEVC encoding across multiple server nodes, this architecture is designed to provide the power to perform high-quality Ultra HD compression on the industry standard servers enabling seamless migration to HEVC and cost-effective scalable deployment into datacenter and clouds.

This week, Envivio 4K Ultra HD compression technology is being used by French broadcaster TDF for live streaming of the French Open 2014 Tennis Championship through compatible 4K TV sets in France. This represents the world’s first digital terrestrial television broadcast video transmission delivered in 4K, using HEVC compression. We are seeing growing interest in 4K HEVC technology and of ongoing trials worldwide with multiple operators.

Also at NAB 2014 we showcased personalized any-screen-TV services and ad insertion by our Halo products. For example, an existing European customer, escalated a comprehensive OTT service and uses Halo for time shifting as part of this service. We are encouraged by the growing interest in our Halo products, from existing customers and Tier 1 operators.

This quarter Envivio introduced a G5 family of Intel based server appliances. Leveraging the latest generation Intel Xeon IvyBridge processor, the new G5 platform significantly increases compression density, supports the latest Ultra HD 4K resolution and HEVC encoding, and lowers operating expenses for service providers. We also continue to strengthen our support and sales teams to improve our sales execution. Today we announced the opening of a new sales and customer support office in Denver, Colorado where multiple Envivio Tier 1 customers have significant operations.

This quarter was a challenging quarter for Envivio with typical seasonal revenue declines further impacted some delays in orders from our service provider customers. However, we are consciously optimistic that the trends we are seeing in the market our technology and product investments and our continued focus on improved execution will lead to improved results in the near-term.

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, unless otherwise indicated. A reconciliation of non-GAAP to GAAP measures was included in our earnings release and can also be found on the Investor Relations section of envivio.com.

Let me now discuss the results for the first quarter fiscal year 2015 in more detail. Revenue for the first quarter was 8.4 million compared to 12.5 million in the prior quarter and 7.5 million in the first quarter of fiscal 2014. The sequential revenue decline was due to several factors including typical seasonality expected in the first quarter as well as the late orders resulting from market consolidation and reorganization amongst our service provider customers.

In the first quarter our revenue from the Americas was 3 million compared to 4 million in the prior quarter and 2.6 million in the first quarter of the prior year. Our revenue in EMEA in the first quarter was 3 million compared to 4.9 million sequentially and up slightly from the prior year. The sequential decline is primarily due to orders received but not recognizable in the first quarter. Our revenue in Asia-Pacific in the first quarter was 2.4 million compared to 3.6 million sequentially and 1.9 million in the prior year.

Our gross margin percentage for the first quarter was 68% compared to 66.8% in Q4 and 63.3% in Q1 of last year. Non-GAAP gross margin for these periods are the same as GAAP. The sequential and year-over-year improvements in gross margin were due to the ongoing trend of increased adoption of our software solutions by Tier 1 North American service providers. As a reminder, we expect overall gross margin percentages to fluctuate based upon geographic and customer mix.

Non-GAAP operating expenses for the first quarter of fiscal 2015 were 9.6 million, up slightly from 9.5 million in the prior quarter and up from 9.1 million in the year ago quarter. Non-GAAP R&D expenses for the quarter were 2.5 million compared to 2.2 million in Q4 and 1.9 million in the year ago period. Non-GAAP sales and marketing expenses for the quarter were 5 million compared to 4.7 million in Q4 and in line with the year ago period. Non-GAAP general and administrative expenses for the quarter were 2.3 million compared to 2.6 million sequentially and 2.1 million in the year ago period. Non-GAAP operating loss was 3.9 million compared to a loss of 1.2 million in Q4 and a loss of 4.3 million in the prior year quarter.

Stock-based compensation expense for the first quarter was 613,000 compared to 646,000 in Q4 and 519,000 in the prior year quarter. GAAP net loss for the first quarter was 4.5 million or a loss of $0.17 per share compared to GAAP net loss of 2 million or a loss of $0.08 per share in Q4 and GAAP net loss of 4.7 million or $0.18 per share in the first quarter of last year. This sequentially higher net loss was the result of lower revenue in the quarter for the reasons I mentioned earlier. Non-GAAP net loss for the first quarter was 3.9 million or a loss of $0.14 per share compared to non-GAAP net loss of 1.4 million in Q4 or a loss of $0.05 per share and non-GAAP net loss of 4.2 million or $0.16 per share in the first quarter of last year.

Moving now to the balance sheet, total assets at the end of the first quarter were 63.3 million compared to 67.3 million at the end of Q4 and 67.7 million at the end of the first quarter in the year ago period. We ended the quarter with 44.4 million in cash and cash equivalents as compared to 47.9 million in cash and cash equivalents at the end of the fourth 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 million compared to 6.7 million in Q4 and 4.9 million a year ago. The year-over-year increase reflects an increase in sales of our service level agreements and the commercial terms of some orders shipped in the quarter. Revenue from direct sales was 64% for the quarter compared to 49% in the prior quarter and 34% in the year ago quarter. The increase was primarily a result of large orders we received this quarter from Comcast. Our DSO for Q1 were 98 days compared to 78 days in Q4 and 108 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 first quarter was 94,000, up from 75,000 in Q4 and 545,000 in Q1 last year. We ended the quarter with a total headcount of 163 flat with the prior quarter and down slightly from 164 in the prior year quarter. To recap, while we are disappointed with our revenue results this quarter, we are pleased to have had year-over-year revenue growth across all of our geographies and continue to achieve strong gross margins, a sign of the ongoing market adoption for our software based multi-screen solutions. While we are still cautious of the variability of our customer spending patterns and remain focused on controlling our operating expenses, we will continue to innovate and provide market leading technology to maintain our competitive advantage in the video processing market.

We look forward to capitalizing on the growth opportunities in our market including the new areas of cloud video services and continue to execute on our plan to return to profitability. With that we will now take your questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) Our first question comes from the line of Mike Lin with Stifel. Please go ahead.

Mike Lin - Stifel Nicolaus

Hi, yes, I have a question about the quarter essentially it seems like the seasonality this quarter was a lot higher than usual in terms of decline for the fiscal Q1. I am just curious to what extent it’s kind of a secular trend versus orders being pushed out versus perhaps potentially from the increased revenue contribution from cloud services which I assume probably has a lower upfront revenue right. So, I don’t know if you can breakdown sort of cloud revenues in terms of your sales versus the prior year perhaps that could be interesting information as well to hear about?

Julien Signès

Sure, this is Julien. So, the cloud is not a factor here because the cloud was an introduction an early introduction at NAB, so that’s something that we will see ramping in the future quarters. Also our strategy for that product is to really apply to new applications and/or new customer base, so it shouldn’t interfere at least in the short-term into our base revenue streams. So, it’s not a transformation of our existing business into the cloud, it’s more of an expansion into new areas.

In terms of, but no effect because it has completely being a product introduction, in terms of the quarter I think it’s fair to say that there is, if you look at the prior history in general there is either flat or let’s say around 20% decrease on average Q4 to Q1. So, we are seeing more -- sharper decrease here and it is really linked to those delayed orders and I would say the delayed orders can be subsequently split into two categories. One is, our level of activity in North America except for one of our leading customers at 29%, if you look at the rest of the 10% customers that we have had, have all been significantly disrupted by their reorganizations and so we haven’t seen much activity link to those.

And then internationally as we noted, there has been quite a bit of market delay and this is mostly for prudence, general budgeting cycles and lack of readiness in general of the customers. And so I would say that it’s hard to allocate percentages but like back of the envelope half of the decline is going to those delayed orders and there is a mix in there of U.S. potential orders that we didn’t get and some delays into the international markets.

Mike Lin - Stifel Nicolaus

Okay, very good and following up on your largest customers it seems like the order flow was very fairly good this quarter unlike the other Tier 1 service providers. I was just wondering if you can give sort of like an update or color because obviously your largest customer is undergoing in a situation with an acquisition, but have they kind of expressed to you that Envivio have they talked with you about Envivio becoming a solution for the parent company post acquisition, have any of those discussions taken place or is it a situation where it’s too early to have those discussions?

Julien Signès

Well in general we have mentioned that before the acquiring party at least in of these famous we don’t know any names, but one of this famous ongoing consideration in our industry is an existing strong customer and so we believe we can survive the post-acquisition merger, if that happens. In terms of the other activities, one of them is more of an internal reorganization with acquisition of technology by that company. We think that’s mostly a question of timing and reorganization. We don’t think that’s a long-term threat. And then you saw recently, we can name this one that AT&T and Direct TV are talking these have not been significant customers and they didn’t show up in our 10 percenters but obviously these are people we’re engaged with and so that can be disruptive, that can be more disruptive but not disruptive at the current business since we don’t have a significant business today. So it could disrupt plans to extra rate some of the business adoption there.

Mike Lin - Stifel Nicolaus

And finally just qualitatively, can you give us a sense of sort of what the pipeline or RSPs have been, have they kind of been flat accelerating, can you give us a sense of what…?

Julien Signès

Year-over-year, we continue to see us pretty significant increase in percentage of the pipeline, so we continue to see a level activity. We mentioned several times in the past quarters, we’re more engaged in the larger existing Pay TV deal as well as expanding into these Halo ad insertion time shifting opportunity. So that are starting to show up more in the pipeline and so overall there is a general increase of the pipeline here both sequentially and year-over-year. So from that comes the cautious optimism we’ve talked about.

Mike Lin - Stifel Nicolaus

Okay, understood. Alright, thank you.

Operator

Thank you. (Operator Instructions) And I would like to turn the conference back over to Cynthia Hiponia for any closing remarks. Please go ahead. One moment ladies and gentlemen -- and I would like to turn the conference over to Cynthia Hiponia for any closing remarks. Please go ahead.

Cynthia Hiponia

Alright, Katja. Thank you again for joining us on today’s earnings call. And we look forward to speaking to you again next quarter.

Operator

Thank you ladies and gentlemen. This does conclude our conference for today. Thank you for your participation. You may now disconnect.

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