Qumu Corporation (NASDAQ:QUMU)
Q2 2014 Earnings Conference Call
July 30, 2014 4:30 PM ET
Douglas Sherk – IR
Sherman Black – President and CEO
Jim Stewart – CFO
Elizabeth Lilly – GAMCO Investors
Good day, ladies and gentlemen. Welcome to the Qumu Second Quarter 2014 Financial Results Conference Call. Today’s call is being recorded. (Operator Instructions). At this time I would like to turn the conference over to Mr. Doug Sherk of EVC Group. Please go ahead, sir.
Thank you, Catherine and good afternoon, everyone. After the close of the market today Qumu issued its second quarter 2014 financial results news which included record quarterly revenues for the company’s software business. The release is available on the company’s corporate website at www.qumu.com.
Before we get started during the course of this conference call the company will make forward-looking statements about its future plans, objectives, beliefs, expectations and prospects. For this purpose any statements made today that are not statements of historical fact may be deemed to be forward-looking statements. These forward-looking statements are not guarantees of future actions, outcomes, results or performance. By their nature these forward-looking statements are subject to many risks and uncertainties that could cause actual results to differ materially from the results discussed in or implied by the forward-looking statement.
A discussion of the risks and uncertainty that affect Qumu’s business is contained in the company’s SEC filings, particularly under the heading Risk Factors and in the press release issued this afternoon. Copies of these documents are available online from the SEC or on the Qumu website. These forward-looking statements are made only as of the date this conference call was initially held and the company assumes no obligation and does not intend to update these forward-looking statements after the date of this conference call, whether as a result of new information, future events, developments, changes in assumptions or otherwise.
And now I’d like to turn the call over to Sherman Black, President and Chief Executive Officer of Qumu.
Thank you, Doug. Good afternoon, and thank you all for joining us on our conference call to discuss our second quarter performance. With me today is Jim Stewart, our Chief Financial Officer.
Our second quarter results demonstrate that Qumu is maintaining our leadership position in the enterprise video. We began to see the top line potential of the Qumu’s software business during the second quarter. We had the highest software revenues than in any quarter in the company’s history. At $8.4 million second quarter revenue was up 74% as compared to the second quarter of 2013 and up 114% sequentially as compared to the first quarter.
We’re still in early adoption stage for video and the enterprise. But we see market continuing to grow and demand continue to rise as evidence by the 170% year-over-year growth in our contracted software commitments. There were a number of milestones achieved during the second quarter aside from our record revenue.
We completed the sales of the Rimage disc publishing business on July 1st. The completion of this transaction provides Qumu with approximately $19 million to $20 million in net cash after post-closing adjustments, taxes and return of $2.3 million escrow in 2015. The sales allowed our team to be totally focused on the significant market opportunity we have in enterprise video. We generated strong growth in our software contracted commitments and have increased this metrics expected growth rate for the full year to more than 50%. We recognized the first revenues from our largest software contract ever, a multi-year video-as-a-service contract with a major technology company that we announced in March.
In order to recognize this revenue we had to hit certain deployment milestones during the quarter which our team did. During the quarter we continued to add new customers to our already impressive list including one of the largest financial institutions in the world and we also recognized our first revenue in Japan validating our investments in product localization and global deployment.
Our opportunity to be the global leader in the enterprise video remains very clear and achievable. We made significant investments in technology in sales and in marketing initiatives around the world and now we have a significant pipeline in Europe, Asia as well as the Americas. We believe all enterprises will adopt video just as they have adopted other fundamental communications technologies over the last couple of decades. As a result we believe that the total market opportunity can exceed $1 billion annually. We are well positioned to capitalize on this opportunity. Qumu offers the best enterprise video solutions and industry analysts continue to validate our leadership position.
All four major independent research organizations have evaluated our solutions as best-in-class. Our platform is differentiated around video delivery, mobility, content management, enterprise integrations and flexible deployment in the cloud, on-premise or as a hybrid.
In summary, our record results for contract commitments revenue and backlog for the first half of 2014 are results of a differentiated platform and the growing demand for our best-in-class enterprise video content management solutions. The sale of disc publishing business provides a significant amount of cash for growth. Equally importantly the entire team is now focused on this opportunity in enterprise video. And today we are reiterating our guidance for annual software revenue growth of at least 30% over 2013 as well as raising our guidance for annual software contracted commitments to greater than 50% growth compared to 2013.
With that I’ll turn the call over to Jim.
Thanks Sherman. As a result of our July 1, 2014 closing and the sale of Rimage disc publishing business results, results from this business have been classified as discontinued operations for the second quarter and full year 2014 in accordance with GAAP. In addition prior year financial results have been revised to report disc publishing as discontinued operation as well. The revenue reported in our consolidated P&L now reflects the revenue from our ongoing software business. The operating expenses include all of the costs for the ongoing software business, some of which were previously observed by the disc publishing business which is now reported as a discontinued operation.
With these changes the operating loss in our consolidated P&L now reflects the standalone financial results of the ongoing software business. The disc publishing financial results are reflected in one-line item as net income from discontinued operations reported below the net loss from continuing operations line on the company’s consolidated statement of operations.
Now I would like to discuss the second quarter and first half 2014 software business revenue, gross margin and operating expenses in more detail. Enterprise video content management software revenues were $8.4 million in the recent second quarter compared with $4.8 million a year ago. The main driver of this second quarter revenue increase was the backlog roll-in of $4.8 million from contracts signed in previous quarters.
In addition to the revenue recognized from backlog we also recognized $3.6 million of revenue from contracted commitments that were made in the second quarter. Second quarter software contracted commitments were $7.4 million compared to $3.4 million last year. Driving this increase was a larger number of deals and strong bookings in the Americas across a number of vertical markets including financial services, technology and general industrial markets.
Year-to-date through June 30 2014 software contracted commitments were $21.6 million up 177% from last year. Consistent with the second quarter our year-to-date performance was driven by strength in the Americas. Backlog of software contracted commitments ended the second quarter $26 million down slightly from the first quarter level of $27 million as we recognized more revenue in the second quarter compared to the second quarter contracted commitments.
We expect to recognize more than $4.5 million from the second quarter backlog in our third quarter 2014 revenue. As discussed in previous quarter’s software revenue will vary quarter-to-quarter based on the type of contract Qumu enters into with each customer. Perpetual contracts generally result in revenue recognized closer to the contract commitment date while term-based contracts result in most of the revenue recognized ratably over the period of contract.
In the second quarter we saw a shift back to more perpetual contracts as part of our sales mix compared to Q4, 2013 and Q1, 2014. Our recurring contracted commitments were 50% of total in the second quarter versus greater than 70% from the prior two quarters. We expect that the second half mix of recurring contracted commitments be closer to 50% that we saw in the second quarter.
Moving down the income statement, software gross margin in the second quarter was 50% compared to 70% in the second quarter last year but up from 35% in the first quarter 2014. The software gross margin was down from last year due to less perpetual revenue in our sales mix and a greater proportion of lower margin [hybrid] revenue as part of the deal mix as well as increased service cost to support the company’s growth.
The primary driver of the sequential improvement was the higher revenue reported in the quarter and an improved sales mix of higher margin perpetual revenue. Overall, gross margins fluctuate quarter-to-quarter based on the type of revenue we are able to recognize. Specifically the more perpetual and term license revenue we can recognize the better our margins will be. In addition our margins are impacted by the amount of hardware and third-party products that are included as part of our deal mix. In large scale deployments like we had over the last few quarters we have to recognize a larger proportion of lower margin revenue upfront while the better margin term license will get recognized ratably over the term of the contract. Given this dynamic us should expect our gross margins to gradually improve overtime as the term revenue becomes a bigger part of our overall sales mix and we gain scale from growing the business.
Second quarter software operating expenses were $9.8 million, an increase of $2.4 million compared to the $7.4 million level of operating expenses in last year’s second quarter. The primary driver of the increase in second quarter operating expenses compared to last year was an increase in sales and marketing cost that resulted from adding headcount and increased spending on marketing programs. As already stated, these operating expenses now include all the costs for the ongoing software business, some of which were previously being observed by the disc publishing business which is now being reported as a discontinued operation. The additional cost that is now absorbed by the software business from disc publishing was approximately $600,000 in the second quarter 2014.
Second quarter 2014 operating loss for software business was $5.7 million compared to a loss of $4 million in last year’s second quarter. In terms of our year-to-date results software revenues were $12.3 million up 34% from last year. Gross margin was 45% for the first half of 2014 versus 65% last year with the decline mostly due to our deal mix of less perpetual license revenue, a higher proportion of lower margin hardware revenue recognized and increased service cost to support growth. June year-to-date operating expenses were $18.5 million compared to $15.4 million in the same period last year. For the first six months of 2014 the operating loss for the software business was $13 million compared to a loss of $9.5 million in the first six months of 2013.
Now turning to the results of the discontinued operations, the net income from discontinued operations was $2.2 million in the second quarter and $5.5 million June year-to-date. This includes approximately $1 million of transaction expenses in the quarter and $1.2 million of transaction expenses year-to-date.
Turning to our cash position, cash and marketable securities totaled $48 million at June 30, 2014. This June 30 amount did not include approximately $17.5 million of net cash received from the sale of the Rimage disc publishing business subsequent to the end of the second quarter. Cash and marketable securities was $46.5 million at March 31, 2014. The main drivers of the $6.5 million second quarter cash usage compared to the first quarter was a $3.4 million consolidated net loss in the quarter which included $1 million of transaction expenses and an increase in working capital investment primarily an increase in receivables due to the rapid growth of the company’s software revenues.
Capital expenditures were approximately $300,000 in the second quarter. We did not buyback any shares of Qumu stock during the second quarter. The company has approximately 778,000 shares remaining on its repurchase authorization. The company expects to end the third quarter 2014 with cash and marketable securities of between $50 million and $53 million. Our results and strong contract performance in the first half of 2014 provide us with additional proof points for the growth opportunity in our enterprise video content management software business.
For 2014 we are raising our guidance from software contracted commitments to greater than 50% growth compared to 2013 from our prior guidance of growth in the range of 40% to 50%. Further we continue to anticipate growth in our software revenues of at least 30% over 2013 recognizing that as we’ve previously disclosed software revenue will vary quarter-to-quarter based on the type of contract Qumu enters into with each customer.
That concludes our formal remarks. Now Sherman and I would be happy to answer any questions. Operator, could you please open the line for Q&A?
Absolutely gentlemen. (Operator Instructions). And with no questions in the queue I’d like to go and turn things back over to our speakers for any additional or closing remarks.
Thank you, operator. Before we sign-off today I would like to make all you guys aware of the monthly How Business Does Video Program that’s produced by our marketing team. The information included in this video production includes a summary of news programs on how our customers, corporations and organizations are adopting enterprise video and related trends in the marketplace. If you would like to receive it, please let Douglas Sherk at EVC Group know and we’ll get you added to the distribution list. I want thank you all of again for joining us today and if you do have any questions you guys know how to reach Jim and myself and we look forward to updating you.
Sorry. Pardon the interruption gentlemen, we do have a question in the queue. Sorry.
We will take it. Thank you.
Great. You are welcome. And Beth Lilly with GAMCO Investors. Please go ahead.
Elizabeth Lilly – GAMCO Investors
Elizabeth Lilly – GAMCO Investors
I have a question. You’re going to – first of all congratulations on the terrific execution and the growth in the business. It’s impressive and is a testament Sherman to what you said you’re going to accomplish and in fact I mean market seems to be growing much faster than I have ever imagined.
Can you talk about – you’re going to – post the closing of the transaction, once it’s closed. You’re now going to have $50 million in cash on the balance sheet. Can you talk about the share repurchase – and I understand that you’re burning cash right now but with the enterprise value of the company today in the marketplace and where prices have occurred, I mean it seems to me that and I can’t imagine that you going to need $50 million to operate the business. Where do share repurchase rank on your priority list?
Yeah, Beth, I said earlier I thought that – first all I want to thank you for the congratulations, and one of the things I didn’t said in the remarks as I did talk about the differentiation of our platform and I did talk about the market growing around this but team did good work very hard and they did execute and really I want thank the team for everything they did. But thanks for those kind words and thanks for throwing a question at us.
But seriously in terms of how we look at the use of cash, I want to go back to what I said in this call which is we think we got a very, very strong market growth opportunity in front of us. And I believe that we’re saying here today, we look at take the enterprise content management market, that was a $5 billion market in 2013, take we conferencing and collaboration. That was a $3.5 billion market in 2013 and then you take digital content creation another $3.5 billion. Add those three parts up, there is a $12 billion market opportunity. Video fits in the middle of that and I could probably throw in terms like mobility, I can throw in terms like business analytics.
We’re at the intersection of all these items. And as video becomes such a pervasive element inside the enterprise, we’re going to be pulling dollars from all of those markets and that’s why when I look at it I can easily see more than a $1 billion market opportunity. So, as I said here today, a small company going after a big opportunity, we’re very conservative around cash and we’re very much willing to be positioned for those opportunities because this market is going to continue to grow. We’re going to continue to make investments in the right area. I think we got a lot of cost opportunities we’re going to address over the coming months. But right now as far as looking at cash we are going to keep a close eye to it. I don’t see stock buybacks playing a part in it at this time.
Elizabeth Lilly – GAMCO Investors
So and the $50 million just so I can understand, is it because you want to invest in the core business internally or is it you want to make acquisitions, help us understand, Sherman?
Well, if you look at any growing market, there is organic platform extensions that we’re going to do. There may be opportunities that come along as well for acquisitions. I just know that this market is happening and evolving so quickly I would not go off right now and buyback a major portion of the company. And I do think it’s under-valued I personally brought stock at a higher price than where the stocks at right now in the last 90 days. And so I do think it’s an undervalued stock.
Elizabeth Lilly – GAMCO Investors
Okay. All right. Well, thank you and again congratulations.
Thanks Beth. Operator are there any other questions?
Not at this time. (Operator Instructions). And gentlemen, nothing additional in the queue. I turn things back over to you.
All right. Well, again if you add any additional questions, please feel free to reach out to Jim and I would love to talk to you and we look forward to updating you on our next quarterly conference call in October. Thank you.
Thank you. And ladies and gentlemen again that does conclude today’s conference. Thank you all again for your participation.
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