Brightcove's (BCOV) CEO David Mendels on Q2 2014 Results - Earnings Call Transcript

| About: Brightcove (BCOV)

Brightcove (NASDAQ:BCOV)

Q2 2014 Earnings Call

July 24, 2014 5:00 pm ET


Brian Denyeau - Senior Vice President of Technology Software

David R. Mendels - Chief Executive Officer and Director

Christopher Menard - Chief Financial Officer and Executive Vice President


Tom M. Roderick - Stifel, Nicolaus & Company, Incorporated, Research Division

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

Jennifer Swanson Lowe - Morgan Stanley, Research Division

Eric Lemus

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


Greetings, and welcome to the Brightcove Second Quarter 2014 Earnings Conference Call. [Operator Instructions]

I would now like to turn the conference over to your host, Brian Denyeau of ICR. Please go ahead.

Brian Denyeau

Good afternoon, and welcome to Brightcove's Second Quarter 2014 Earnings Call. Today, we'll be discussing our results announced in our press release issued after the market close today.

With me on the call today are David Mendels, Chief Executive Officer; and Chris Menard, Brightcove's Chief Financial Officer.

During the call, we will make statements related to our business that may be considered forward-looking and are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements concerning our financial guidance for the third fiscal quarter of 2014 and the full year of 2014, our position to execute on our go-to-market strategy, difficulties integrating the technologies, products, operation, existing contracts with Unicorn Media and realizing anticipated benefits of the combined business, our ability to expand our leadership position and our ability to maintain existing and acquire new customers. Forward-looking statements may often be identified with words such as we expect, we anticipate, upcoming or similar indications of future expectations.

These statements reflect our views only as of today and should not be reflected upon as representing our views as of any subsequent date. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations. For a discussion of material risks and other important factors that could affect our actual results, please refer to those contained in our most recently filed annual report on Form 10-K and as updated by other SEC filings.

Also, during the course of today's call, we will refer to certain non-GAAP financial measures. There's a reconciliation schedule showing GAAP versus non-GAAP results currently available in our press release issued after the close of market today and located on our website at

In terms of the agenda for today's call, David will provide a summary review of our financial results, market opportunity, as well as an update on our operations. Chris will then finish with additional details regarding our second quarter 2014 results, as well as our guidance for the third quarter and full year 2014.

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

David R. Mendels

Thank you. Thanks, Brian, and thanks to all of you for joining us today on our second quarter 2014 earnings call. We delivered second quarter revenue of $31 million and non-GAAP loss per share of $0.04, both of which exceeded the high end of our guidance ranges. While we delivered solid financial results relative to our guidance, we also faced headwinds that have negatively impacted our outlook for the second half of 2014, which Chris will detail later. I'm disappointed in our performance in the second quarter and focused on ensuring the entire organization is properly aligned to deliver improved operational and financial performance going forward.

There are several roughly equal factors that, in combination, are negatively impacting our outlook for the second half of the year. First, we expect that one of our large European customers, Rovio, will not be renewing its contract when it comes due in late August. Rovio is the company behind the Angry Birds franchise. They represent 3.8% of our revenue and a little under 15% of our streams in the first half of the year. We have had a strong working relationship with Rovio, and we were hopeful over the course of the quarter that we would be able to retain them as a customer. Although they are still using our services today, we expect them to extend an internally built contact management system that they've had under development for several years to handle their digital content delivery needs and to bring their technology needs in-house.

Rovio has always been a fairly unique use case since most of the video they deliver is embedded directly into the game itself, which means they were only leveraging a small part of the Video Cloud -- of Video Cloud's functionality, primarily our content management system. The end result was a deployment that was much less sophisticated than our typical broadcast customer. While we will obviously be disappointed to lose Rovio as a customer going forward, we believe the circumstances surrounding such a result are not relevant to the vast majority of our customer base.

Secondly, we are seeing the speed of customer implementations of our Once product lag our expectations. As we have purposely discussed, Unicorn had a different business model than our traditional Video Cloud offering that is comprised of a modest upfront commitment, and then revenue that scales with utilization by the customer. We are seeing the implementation of Once across a customer's portfolio taking longer than we originally expected. Our -- as a result, we expect Once revenue will now be approximately $1.5 million below our original forecast for 2014. We remain very excited about the prospects for Once and believe as we transition them to our traditional contracting model, this business will become more predictable. Our revised guidance accounts for our changed expectations in the short term around Once revenue.

Third, we had some execution challenges that led to a difficult bookings performance during the quarter. In the digital media business, we have an expanding pipeline of 6- and 7-figure deals that are taking longer to close than originally expected. And in digital marketing, the go-to-market transition towards our new gallery and video marketing suite products had a more pronounced impact on our near-term results than we anticipated.

In recent quarters, we've introduced changes to the organizations to properly position the business for the evolution we're seeing in the marketplace. This includes shifting from our historical horizontal sales approach that primarily focused on a one-size-fits-all tactical solution that targeted the IT department, and moving towards a sales process focused on delivering improved revenue performance to business users inside digital media and marketing organizations. While their use cases are different, both sets of customers are increasingly focused on utilizing digital content to drive improved revenue growth, whether through advertising for the digital media company or brand awareness and conversion for the digital marketer. While we feel very good about this strategy and change in messaging and how it will position Brightcove to deliver more value to our customers, we underestimated the impact this transition would have on the business and how long the process would last.

Internally, we refer to the changes we've made to the -- to position the company to execute on this strategy as Brightcove 2.0. And many of its elements are things we have been discussing with you on recent calls, including: the launch of the Brightcove Once cloud-based ad insertion service acquired through Unicorn; the recent launch of Gallery, our new video portal solution that provides a turnkey solution to digital marketers looking to extend the reach of their video libraries to more customers on any device; and the new Video Marketing Suite, creating 2 distinct sales and marketing organizations that are specifically focused on targeting digital marketing and digital media accounts, including doubling the digital media sales organization that is targeting the 300 largest media organizations through the Unicorn acquisition; the elimination of our volume, small-and-medium-business focus to focus on the premium brand and enterprise portion of the market; and delivering more elements of Video Cloud as a discrete utility to address the specific needs of customers who may not be ready to deploy the entire platform, which will include the next-generation Brightcove video player later this year.

We've spent the last several weeks doing an exhaustive review of the sales pipeline and our go-to-market messaging and believe we have the right strategy in place. We expect our efforts will take a few quarters to have the desired impact, but we are confident that we have the products, value proposition and organization to execute our strategies.

I'd like to review our business in each of these areas. In our digital media business, we believe the online video platform market has entered the second stage of the transition from traditional broadcast television to digital video content that is available across a wide and expanding array of devices. This second stage is moving beyond establishing a meaningful online video presence and delivering a digital and mobile-first strategy that can provide significant monetization opportunities. This is an exciting long-term development and represents a significant opportunity for us. We've been proactively improving our solutions to meet this emerging market need and believe the combination of Video Cloud, Once, Zencoder and our upcoming next-generation player service represents a highly differentiated set of products and services for this market. Our expanded product set and enhanced capabilities are getting positive feedback from key target accounts globally and position Brightcove well to become more mission critical and deliver greater value to our customers.

We are optimistic about our core strategies and our ability to close the 6- and 7-figure deals in our pipeline over time. But these deals are harder to forecast and are taking longer to close than we originally anticipated.

In our digital marketing and enterprise business, we are doubling down on our focus of selling to the office of the CMO to help them drive better revenue growth. To better position ourselves in this market, we recently introduced 2 new products, Brightcove Gallery and the Brightcove Video Marketing Suite, and end of lifed our small and medium business editions. We've also begun a fundamental reworking of our go-to-market and marketing strategy, including recently shifting our messaging away from the technical benefits of our solutions to host and deliver digital video, to focus our sales and marketing efforts on business users with budget to drive revenue growth. This is leading to more strategic conversations with customers and a larger initial deal than we saw when we were selling Video Cloud to solve the technical problems inherent in digital content delivery.

As we've made these changes, we saw a more pronounced impact than we were anticipating on our demand environment during the transition to these new products. The process of transitioning our marketing programs, sales training, demand generation efforts and playbooks towards these new products and our business use case focus is taking longer than we anticipated. We're confident about our ability to drive accelerating growth in this space with our new product offerings and go-to-market approach.

While we work to improve our sales execution, it's important to note that we did not see a material change in our competitive environment during the first half of the year, and we believe that our product offering continues to get stronger. We recently introduced and previewed several exciting new product innovations at our Brightcove PLAY customer conferences in New York, London, Tokyo and Sydney.

Our new player entered limited, commercial availability during the quarter, as scheduled. And I'm excited to report that we have our first significant customer of the new service, IGN Entertainment, a subsidiary of Ziff Davis and a leading Internet media and services provider focused on the video game and entertainment enthusiast markets. IGN plans to enhance the video experiences of all its properties through implementing Brightcove's next-generation player service, which will deliver industry-leading performance and reach.

Our new player services deliver dramatically higher performance for functions like load times and time to first frame than any other player we have tested in the market, including YouTube, a benchmark for many. These are critical metrics for any publisher, and a wide range of studies have shown that an improved viewing experience drives better business results, including more views and longer view time. The new player also represents best-in-class customizability, platform support and much more. We will be formally launching the new player into general availability in the fall.

We recently introduced Gallery, which represents a big step forward for our digital marketing customers, who are looking to easily create immersive video portal experiences to engage their customers, build brand awareness and drive sales conversions.

Customers tell us that their audience spends twice as much time on video-heavy websites, but custom, mobile-ready and SEO-designed video pages are a challenge to build and maintain. Brightcove Gallery solves this problem with an out-of-the-box video portal solution with best practices for SEO, responsive design, social sharing and conversion that can be implemented rapidly by a marketing professional. Gallery and the Video Marketing Suite, which are purpose-built for the digital marketing industry, are now the primary products we are selling into the digital marketing market.

We also announced new support for Hybrid Broadcast Broadband TV, or HbbTV, which enables broadcasters combined their over-the-air broadcast and IT delivery to publish personalized video and interactive TV experiences to users on connected TVs and set-top boxes. HbbTV provides broadcasters the ability to deliver a more personalized content to viewers, and I'm excited to report that we have our first customers for this new product, including the Nine Network in Australia.

Despite the difficult environment in the quarter, we continue to sign new media customers, including the All England Lawn Tennis Club, best known for hosting Wimbledon, Legendary Pictures and the Asahi Broadcasting Corporation.

Asahi Broadcasting Corporation is a major Japanese broadcaster affiliated with the TV Asahi Network and is using Brightcove Video Cloud to publish ad-supported video for this summer's National High School Baseball Championship tournament, one of the most-watched sporting events in Japan.

An exciting early customer addition for Brightcove Once, was Vice U.K., the U.K. arm of Vice Media, which operates premier, original online video destination and an international network of digital channels. VICE has taken advantage of Brightcove Once to dynamically insert ads into its video programming to better reach mobile devices with advertising via the mobile web.

We also saw a good early traction with Gallery and the Video Marketing Suite. These products were only commercially available for part of Q2, but we've already closed more than 10 deals, including Gallery deals with existing customers like Home Depot, who signed on to use Gallery for its how-to video portal; and the SAS Institute, as well as Video Marketing Suite deals with new customers, Amgen, Boston University School of Management and Planet Fitness. We're also pleased with the pipeline growth we are seeing for these new offerings as well.

Finally, I'd like to give an update on our management team. Chris Menard, our Executive Vice President and Chief Financial Officer, will be departing Brightcove to pursue other career opportunities. Chris will continue serving as CFO until August 28 and then will serve in an advisory role up to November 30, to ensure an orderly transition.

Chris Stagno, currently Brightcove's Chief Accounting Officer, will serve as interim CFO during the transition period. Chris Stagno has been with the company for 3 years, and we are confident he will help us successfully manage through this period as we are actively recruiting for a new CFO.

In summary, the second quarter was a challenging quarter for Brightcove, and we are hard at work to improve our level of execution. While it's taking longer to impact our results than we would like, we are confident that the steps we have taken in recent quarters from both a go-to-market and product perspective are the right moves to position the company for improved performance over time.

Christopher Menard

Thanks, David, and good afternoon, everyone. For the second quarter, total revenue was $31 million, a 15% increase from $26.9 million in the second quarter of 2013 and above our guidance of $29.7 million to $30.2 million. Subscription support revenue of $29.9 dollars was up 17% year-over-year, while professional services and other revenue was $1.1 million compared to $1.3 million in the second quarter of 2013. The revenue outperformance in the quarter was a result of higher-than-anticipated professional services revenue, coupled with strong in-quarter revenue.

Turning to revenue mix. Our premium offerings generated $28.5 million of our total revenue, representing an 18% year-over-year increase, while our volume offering generated $2.5 million in revenue, down 5% from the second quarter of 2013.

On a geographic basis, we generated $18.5 million of revenue in North America for the quarter, which was up 17% year-over-year and represented 60% of our total revenue. Europe recorded $7.7 million, a 19% increase from last year and 25% of our total revenue. While Japan and Asia-Pac generated $4.8 million of revenue for the quarter, up 4% year-over-year and representing 15% of total revenue.

From a vertical perspective, digital marketing and enterprise customers represent 57% of our second quarter revenue, growing 6% on a year-over-year basis, while our media customers represent 43% of our revenue, growing at 31% on a year-over-year basis. I would note that Rovio is included as part of our digital marketing and enterprise segment and will represent a material headwind to growth in that business in the coming quarters. While we continue to see a broad market opportunity and strong demand for our products across a number of industries, we are seeing positive results from our increased focus on the media vertical.

Turning to streams. Our year-to-date average monthly video streams as of June 30 was $1.5 billion, up from $1.4 billion at the end of the first quarter and up 58% versus the first half of last year. Please note that Rovio represented approximately 15% of our streams during the first half of the year. As a reminder, video streams have not historically been a good predictor of revenue, and we do not expect them to be in the future.

Our recurring dollar retention rate was 99% in the second quarter, which is above our targeted rate of 93% to 94%, and represents solid upsell activity into our installed base. Our second quarter retention rate does not reflect the loss of Rovio as their contract won't run out until the end of August. We currently expect our retention rate for the third quarter, which will incorporate Rovio's nonrenewal, to be in the mid-80% range.

Looking at our customer count, we ended the second quarter with 5,995 customers compared to 6,386 at the end of the second quarter of 2013. Breaking this down further, we ended the quarter with 1,833 premium customers, up 10 from the end of the first quarter. We had 4,162 volume customers at the end of the quarter, which was down 141 from last quarter and reflects the strategic shift in resources away from volume to the premium market.

With the increased focus on premium and the media vertical in particular, we believe that average subscription revenue per premium customer is becoming a more relevant metric. In the second quarter, the average subscription revenue per premium customer was approximately $60,000, up 11% year-over-year.

Moving down the P&L. Our non-GAAP gross profit in the second quarter was $21.2 million, a 17% increase from a year ago, and a gross margin of 68%, a 270-point expansion from the end of Q1. Subscription and support revenue represented approximately 97% of total revenue and had a 71% gross margin, while services revenue represented approximately 3% of our total revenue at a negative 21% gross margin.

Non-GAAP loss from operations was $1.1 million in the second quarter, compared to a loss of $874,000 in the second quarter of 2013, and significantly better than our guidance of a loss of $3.1 million to $3.4 million. The earnings outperformance is the result of better-than-expected revenue combined with expense management.

Non-GAAP loss per share was $0.04, based on $32.1 million weighted average shares outstanding, which was better than our guidance of a loss of $0.11 to $0.12 per share and is consistent with a per-share loss of $0.04 on 28.2 million weighted average shares in the year-ago period. On a GAAP basis, our gross profit was $20.6 million, operating loss was $4 million and our net loss per share was $0.13.

Turning to the balance sheet. We ended the quarter with cash, cash equivalents and investments of $20.8 million, down from $21.4 million on March 31. From a cash flow perspective, we generated $724,000 in cash from operations and invested $1.6 million in capital expenditures during the quarter, which equates to a negative free cash flow of $861,000 for the quarter. This compares to a $2 million free cash flow in the year-ago period. Our deferred revenue balance at quarter end was $27.4 million, up 21% year-over-year.

I'd like to finish by providing our financial outlook for fiscal year 2014 and the third quarter. For the full year 2014, we are lowering our guidance for revenue to a range of $122 million to $123.5 million, which represents year-over-year growth of 11% to 12%. We are now forecasting a non-GAAP operating loss of $6.5 million to $7.5 million and a non-GAAP net loss per share of $0.24 to $0.28 for the full year, based on 32 million weighted average shares outstanding. This compares to our previous guidance of a non-GAAP operating loss of $5 million to $7 million and a non-GAAP loss per share of $0.19 to $0.25, respectively.

While we are not in a position to provide complete guidance for 2015 today, we now anticipate that we will become non-GAAP operating income positive in the fourth quarter of 2015. We are now forecasting negative free cash flow of $6 million to $7.5 million for the full year.

For the third quarter, we are targeting revenue of $30 million to $30.5 million, or 5% to 7% growth, on a year-over-year basis, which includes a revenue contribution of $650,000 from professional services. From a profitability perspective, we expect a non-GAAP operating loss of $2.2 million to $2.5 million for the third quarter. Non-GAAP net loss per share is expected to be in the range of $0.08 to $0.09, based on 32.3 million weighted average shares outstanding.

With that, we will now take your questions. Operator, we are ready to begin the Q&A session.

Question-and-Answer Session


[Operator Instructions] Our first question comes from the line of Tom Roderick from Stifel.

Tom M. Roderick - Stifel, Nicolaus & Company, Incorporated, Research Division

So let me throw my first question out here. Just thinking by the big picture in video streaming, particularly as we look at mobile, it seems like the video stream growth across the industry has been picking up at a pretty rapid pace, and certainly so, in mobile. I guess if we look at Brightcove results for the last 18 months, the business has been lumpy and decelerating. How do we reconcile the 2? If it's not a function of losing share or losing out competitively, why is it that you think your customers, particularly large media customers and larger enterprises, are not pulling the trigger on moving their assets to the cloud in the fashion that we might have thought 18 months ago and even 6 to 9 months ago.

David R. Mendels

Sure. It's a very good question, very valid question. I think that we're still dealing with an early and fragmented market, that the customers even the large broadcasters are going through a lot of transition. They are still trying to figure out their strategy. They have a lot of competing interests within their companies and different points of view from both business model and technical strategy perspectives. They've invested in a mix of DIY and vendor, sometimes point vendors and point solutions and sometimes broader vendors that supply a whole online video set of platform services, the way we do. And so there remains a lot of fragmentation in the market. And as we are seeing in the competitive landscape, there hasn't been a significant change in the competitive landscape. There continues to be that fragmentation. We continue to see ourselves in a leadership position. We continue to see ourselves winning more than losing, but we haven't achieved a breakout. And so what we're seeing is a market that remains very fragmented.

We believe that as the combination of the increased focus within these companies, where digital becomes a bigger and bigger percentage of their business model and of their revenue, and as we increase our innovation and the products we bring to market, that can make a difference for them. That we have the ability for both the market to accelerate and for us to accelerate our ability to capture share. But perfectly valid to note that, so far, those have not come together at the rate we would like.

Tom M. Roderick - Stifel, Nicolaus & Company, Incorporated, Research Division

Okay. And David, you had mentioned early in the call, I think, that your projections for Once are now $1.5 million below your original forecast. If I remember right, that forecast was $8 million to $9 million. So I want to clarify that you're now thinking $1.5 million below the midpoint of that range. Can you go into a little bit more detail as to what's going on there? I think you had mentioned, it was implementations taking longer. But it seemed as though, when you made the acquisition that it was a company that had some pretty decent visibility into the -- or at least, predictability, even though it was a different type of revenue model. So help us understand what happened there in a reasonably short time frame since the acquisition. And what do you do from a functional or executional standpoint to correct that, and make sure it's on a growth pattern for 2015.

David R. Mendels

Sure. Again, good question. We're sort of in the low end to midpoint is probably the way to think about it of where we were in the range, in the subtraction of $1.5 million. First of all, let me just say, it's really frustrating. We've had a track record of predictability and being able to get pretty close on our numbers over our time as a public company. And as we told everyone at the time of the acquisition, and again, last quarter, they did have a different contracting model, right? So if you remember, the traditional Brightcove model has been to sign fairly large committed contracts with small -- with the potential for relatively small amount of overages that occur. Whereas the Unicorn business was mostly very small committed contracts, almost trivial committed contracts, and most of the business, most of the revenue came in the overage line or just utilization growth.

And so we used our methodology. We certainly felt good about the forecast that we presented at the time. But it wasn't as predictable and unfortunately, it came in -- it's coming in on the low side. There is 2 factors there and both are really timing questions. They're important questions but they're timing questions. One is, the ramp of existing customers, customers with whom we have a relationship and may be using us for some small project or maybe using us, but not fully rolled out in production, and the ramp at which they move into full production or moving us from one property to 2 properties or 2 properties to 4 properties. And that has taken longer than we would like and, therefore, that is a big source of it. And the second is the rate of both signing and then ramping new clients. And that's also taking a little longer than we would like.

We still feel very good about the fundamental value proposition, the need to deliver ad-supported media to be able to inject ads into the streams across all of these different devices and across both VOD and live, it's really a massive need in the market. So we think it's the right architecture. We think it is core to our technology strategy going forward and so we still feel bullish about it.

I think we need to do a better job in executing. I think that there are things we could do with the product to make it easier to adopt, to make it more self service, to accelerate a customer's ability to go from an initial POC to full production usage. Those are -- I would describe those as polishing the rough edges of a relatively young product. The core technology being great, but there's things you can always do to improve the adoptability. And I think that also there's things on the sales execution side that, when you have larger deals, they are lumpier, they are binary, they can take longer, you have to sell to more stakeholders and all of the things that cause buying cycles to be longer when you do larger, more mission-critical selling. But at the same time, as a sales and marketing organization, I think we can do better and continue to improve our performance in that regard.

So I am disappointed at that rate of adoption that we've achieved so far, but I'm not at all dismayed by the opportunity. And I think that there's a number of things that we can do that are fairly pragmatic and straightforward that can start to improve that over the next quarters.


Our next question comes from Brendan Barnicle from Pacific Crest Securities.

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

Chris, sorry to hear you're going. Really enjoyed working with you. Hopefully, we get a chance to work together in the future. David, on this transition away from the volume customers to enterprise customers, you've talked about this for several quarters now. Where do we think -- or do you think that starts to bottom out to where we can get a customer account number that looks a little more encouraging?

David R. Mendels

So I think that we're going to continue to see the especially the low end of the volume customers. Remember, we have all those "as low as $5 per video per month" kinds of customers. We're going to continue to see that bleed out for some time. So we still have quarters in front of us. I don't think that, in and of itself, it's particularly material to our business.

The key thing for us is to continue to drive the premium business. And when I say the premium business, the primary focus there is on getting long-term revenue growth, not on number of customers. But obviously, we'd like long-term revenue growth and more customers. So both are good metrics to think about.

The key issue there is not that we're bleeding out some of the low-end customers. That's not really a key factor here. The key issue is that -- I'll give you an example. If you think about the way we've sold and our go-to-market, we put a lot of work over several years into what I'd call a volume-selling approach, which was, "Hey, get started now for $99. Come do the trial," and very self-service trial, self-service purchasing, and we built up quite a bit of the low end of our business. Obviously, the volume business but even the low end of the premium business kind of got sold that way.

What we're trying to do now is, I think, a much more valuable kind of selling that will result in a much stronger business. But it is turning a ship. So instead of saying, "Hey, get started for $99. Get a trial. Do it self service." We're trying to proactively get into the right people, the business person who's trying to drive awareness, conversion and loyalty among customers, so the marketing person who has business goals, and help them understand the business metrics that we can drive, help them understand where we fit in a marketing architecture alongside marketing automation systems, like Marketo, and customer experience management systems and analytic systems. And that can result in larger deals. And a Video Marketing Suite deal will be a larger deal than a Video Cloud deal. It can result in slightly longer sales cycles. It can result in healthier customers where they're much stickier because they're tying a business result to their use of our product.

But it is turning a ship because it's changing the messaging, the targeting, sort of the selling process. And I'd like that to have gone faster in the first half of the year. I think that's one of the execution things we'd point to. I don't think it's rocket science. We have a very good team, we've made progress.

I will say, we're really excited about the new products in the digital marketing space and the customers we acquired in the second quarter. We mentioned in the script, Home Depot. We mentioned Amgen, The Boston University School Management, and a number of others. So we have some good early momentum. I think we know what we need to do. I think it is a question of when you're turning a ship and changing the way you sell a little bit, it takes a little bit more time than we hoped.

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

And David, if I look at the guidance, it would suggest that subscription licenses for next quarter would be flat to down sequentially. Do you think that's where those bottom out? Are -- how confident are you that, given seasonality and some of the changes you're making, that we'll see a sequential uptick by Q4?

Christopher Menard

Brendan, it's Chris. I've got it basically flat in Q3. I think there are couple of factors for that. One, as David talked about in his canned remarks, you've got Rovio coming out of revenue starting the 1st of September. Also, in my prepared remarks, we talked about some of the revenue overachievement in Q2 was related to some of the in-quarter revenue. And so we've had 2 pretty strong quarters for in quarter. But I'm not at a point yet where I'm ready to forecast it so I'm still in -- it's a blip and not a trend. And so I've taken that back down to historical averages and that's why we're pretty much flat in Q3 compared to Q2. If we can execute on the sales plan, I would expect that we start to ramp back up a little bit in the fourth quarter, however, it will be the first full quarter without Rovio, so there is a big headwind as we go into the fourth quarter in terms of the quarter-on-quarter growth.

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

Great. And just lastly on cash. You guys have about $20 million in cash. David, do you feel like that's enough for you to be able to do the things that you need to do? Would you guys -- I don't remember if you guys have access to a line of credit.

David R. Mendels

Yes, I think we're in a healthy position. We have what we need, as you've just mentioned, so thank you for answering the question for me. We do have access to a line of credit that we can tap if we feel like we need to, to give us a little bit more room. So we feel quite confident there. We think that, despite the guidance change that we had to report today, we've been able to manage the expenses relatively conservatively, and so we've kept that a little tighter in the range. And so I think we feel fairly good about our ability to get back on a good path to profitability. As Chris mentioned, it'll be a few quarters out from where we had said earlier. But we think that we can manage the expenses and manage the cash in a fairly reasonable way.


Our next question comes from Jennifer Lowe from Morgan Stanley.

Jennifer Swanson Lowe - Morgan Stanley, Research Division

Basically, a little bit back to some of the questions Tom had earlier. If you -- looking at, Chris, your updated profitability targets, implicitly, it sounds like '15 revenues are coming down a bit as well. And some of that seems like it would to be purely mechanical, with Rovio coming out of the model. But beyond that -- and maybe sort of a broader question is, if you think through some of these issues that impacted Q2 and it sounds like will impact Q3 around execution and sort of changing the go-to-market strategy to focus more on value-based selling and move upmarket a bit, what's sort of your expectation on how long those are overhangs on growth? Is this something that -- the pipelines are there. It's just a matter of converting. Or is this something that could take 6 or 9 or 12 months to really get working the way you'd like it to?

David R. Mendels

Well, this is David. I think you -- keep in mind the way the math works on something like Rovio. We're going to have a 12-month headwind from -- assuming a non-resumal [ph] does occur, that will be a 12-month headwind right there. And so it will take a little bit of time for us to right the ship.

The focus for the management team, and really for every company -- every employee of the company, is to change the slope. We feel good about the innovation we're delivering on the product side, in fact, better than ever with the new products in first half and some things that are coming in the second half. We feel good about our pipeline. I think I mentioned, we have more 6-figure and greater deals in our pipeline than we've ever had. We need to get back on track. So we need to finish that turning the ship. We need to execute well on some of those larger deals and start bringing them in. We need to improve the predictability on the Once business.

So I don't want to be too specific yet on a date for a turnaround, and we're not ready to guide next year. But what we're working on is to move as quickly as possible, net of headwinds that are already in place, to turn the slope back to accelerating growth. And that's the focus of myself and focus of the management team.

Jennifer Swanson Lowe - Morgan Stanley, Research Division

And then maybe just one last one for me. On the Rovio decision to bring the technology in-house, there've been some other large -- and I'm thinking specifically of AOL, that have also been big customers of yours historically, who, at one point, took it in-house. That was also a little bit of a different situation where they had acquired a product. But I'm just curious, as you think about -- and on the other hand, you're getting more of these big deals. So certainly, it doesn't seem like the trend is anyone who's spending a lot necessarily wants to move in-house with that. But just broadly, as you think about that, that we've seen a couple of other customers now make the decision to insource, what gives you comfort that, that really is a unique set of circumstances? Because Rovio isn't the first time we've seen that. So is there a point where a customer spending enough with you that it does start to make economic sense to bring things in-house? And how do you sort of combat that?

David R. Mendels

So good question. There's actually several questions embedded in there. So I think, first of all, the AOL situation is now many years old and, as you mentioned, they bought a company that had core technology. So it's really apples and oranges there.

But I think what you're getting at, sort of as an underlying point, relates to what I said earlier about the sort of earliness and immaturity in the market, the fragmentation, the lack of clarity in terms of people still trying to figure out what they want to do, the lack of clarity in terms of a lot of internal organizations. Who's on top? Is it the broadcast engineering team or the digital engineering team? And what are their priorities. And so you're still seeing a lot of companies sort of zigging and zagging in terms of what they're trying to do, despite the fact that we all know that there's this fundamental trend to more video coming online, despite the fact that as consumers we all experience that and watch video more online than we did a few years ago. There's still a lot of uncertainty within given companies about what's our strategy? Where are we going to make money? How is this going to work? What are we going to use our own technology for and others. And so in a period like that, you're still going to see people moving around in funny ways that aren't all in a straight line. But the long-term slope of that line is clearly towards outsourcing a lot of this core technology. And that's the fundamental trend. If I were to look at the vast majority of the customers we're talking to, it's in that direction. So whether or not any 1 or 2 or x companies would zigzag, that is the nature of where we are in an early market. But I don't think that's a trend. I think the fundamental trend is more towards outsourcing.

In terms of, is there a point where the cost gets to a point where people inherently insource, I don't think that's a fundamental problem. I think it is incumbent on us to continue to innovate in how we deliver our product; in how we deliver ROI for our customers; in how we help them understand that ROI, and that's core to why we bought the Once product, by the way; and in how we drive down cost. As people deliver more and more video online, and unless their ad revenues per CPM are magically going up, then that does require us to be innovative on the technology side. And there's a number of things we do every quarter and plans we have from an innovation perspective to be disruptive in that regard as well.

Let me add one more point that just ties into a theme we've talked about a couple times over the last few calls, which is, there are organizations out there that have, what I'd call, a genetic bias towards DIY, right? They have tech teams. They've built their own DIY broadcast solutions. They want to build their own. And that's something we've wrestled with, how do you sell into those organizations for years. And we do have a really clear strategy for that, that we've talked about some and that's really coming into fruition, which is to move our product from a monolithic solution to a -- more of a modular or à la carte solution. And when I say move, I mean we'll still offer both. It's not a replacement, it's an addition. And I think that's a really effective strategy. We're going to see some very positive results from that over the next year for companies that aren't thinking, "Hey, I want to buy a single system, a monolithic system to build out my publishing model." But rather, they're thinking "All right, I have this team that needs to buy a player," or "I have that team that needs to buy cloud encoding," or "I have this team that needs to buy dynamic ad insertion." And our ability now to meet those customers' needs and sell to them the way they want to buy is really enhanced. And I think that's going to open up a lot of opportunities for us that might have been tougher in the past.


Our next question comes from Eric Lemus from Raymond James.

Eric Lemus

My first question, I guess, Chris. Looking at the guidance that you have for profitability for this year, even if you x out the Rovio. Is there, first, correct me if I'm wrong, but is there incremental investments that we're seeing that we ingrain in the guidance versus the guidance that you guys gave last quarter, if you x out the Rovio issue.

Christopher Menard

Yes. I mean, we're still investing in headcount in both sales and marketing and R&D. That's not really tied to the Rovio portion of the guidance, though, which is more a revenue play. So I'm not sure I completely understand your question.

Eric Lemus

Yes, I guess, when I was just doing "back of the envelope" math with the EPS guidance, even if you back out the Rovio revenue contribution...

Christopher Menard


Eric Lemus

I guess, removing the Rovio, it appears that the EPS was lower than the previous guidance. I guess margins are lower than the previous guidance would have assumed. Is that...

Christopher Menard

Yes, we've lowered the revenue target for the year and so the EPS is a couple of pennies different from -- on the annual side from what we guided last time. But we haven't taken out -- it's not as though every dollar of Rovio revenue has dropped through directly to the EPS line.

David R. Mendels

I think -- just to add. Keep in mind that Rovio is 1 of the 3 components.

Eric Lemus

Right. Okay, I got you. Okay. And then my next question, as far as the Unicorn Once product, are you guys seeing -- you had it -- guys have that acquisition under your belt for several quarters now. But are you seeing some more cross-sell activity as a result of that? And some of your larger deals that you're seeing in the pipeline, are these a result of cross-sell? Or is this net new customers?

David R. Mendels

We see both in terms of the pipeline. We're seeing traditional Brightcove customers sector that are interested in Once, Once customers that are interested in the other products that Brightcove offers. And it's also helping us with new customers that we may not have been in or we may not have been in a good position with, but now we have a more differentiated competitive position. So again, we have a strong pipeline. And if we can execute really well over the next few quarters, we can start to see some really good results in that regard.


Our last question comes from Steven Frankel from Dougherty.

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

So given all the sales execution issues, what's happening with sales headcount? Have you had either forced turnover or unforced turnover? And kind of how many empty slots do you have headed into the back half of the year?

David R. Mendels

We've had some of both, as you would expect. And we do have a number of open slots across regions and across both selling side and the account management side. So obviously, at a time like this, you look at every aspect. We've really scrubbed everything we're doing. And so on the sales side, on the marketing side, the lead generation side are all aspects of this. And so we're certainly looking at everything we're doing. We believe fundamentally in the strategies we put in place in the beginning of the year. We started to break out our go-to-market operation into a outbound target-account model for media, that was really clean and just focused on media, and an inbound inside-sales operation for the digital marketing and enterprise group. And fundamentally, that division has helped us a great deal, I think, in sort of getting focus and clarity. But again, as we turn the ship, there's still work we have to do to get the results that we want it to have.

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

And one more question on Once. So this inability to get customers to ramp up materially, to put it on multiple properties, does that stem from maybe some skepticism on their part that it really has the ROI that it seems to have? Or do you think it's technical issues that you can solve through polishing, as you called it, taking the rough edges off the product?

David R. Mendels

I think it's more on the technical side, to be completely frank with you. I think that the technical complexity here is relatively high. Our product's pretty clean. But the implementation is a mix of multiple things. And so if you're a broadcaster and you're implementing this, you're bringing in encoding, you're bringing in our products, you're bringing in things like Nielsen, audience measurement and comScore, you might be using a custom tracking in something like Omniture, you might have some other tracking for revenue share. And so what we're finding is that the complexity of the integration is slowing down the implementation. And that's a big factor.

I think we still have good feedback on the ROI from our existing customers. I think that there's no doubt that we can deliver to a client dramatically better reach, so they can reach, really, every device out there, as well as a better user experience. And we see customers that get clear uplift in terms of ad views and ad revenue in relatively short periods of time. So it's a frustrating situation, but I think we can get through it in a reasonable amount of time.


Now I'll turn the call back over to our speakers for closing comments.

David R. Mendels

Well, thank you very much. I appreciate everyone's questions here today. I'll take a moment to thank Chris for all of his contributions on the calls we've had since we've been public. And I look forward to speaking with you more. So thank you, all.


Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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