YuMe, Inc. (NYSE:YUME)
Q2 2014 Earnings Conference Call
August 13, 2014 04:30 PM ET
Gary Fuges - VP, IR
Jayant Kadambi - Co-Founder and CEO
Tony Carvalho - Acting CFO
Ross Sandler - Deutsche Bank
Kerry Rice - Needham
Gene Munster - Piper Jaffray
Mark May - Citibank
Good afternoon. My name is Chris and I will be your conference operator today. At this time, I would like to welcome everyone to the YuMe Inc., Second Quarter Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions). Gary Fuges, Vice President of Investor Relations. You may begin your conference.
Thank you, Chris. Good afternoon and welcome to YuMe’s second quarter 2014 financial results conference call. Joining me on the call today are Jayant Kadambi, Chief Executive Officer; and Tony Carvalho, Acting 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 August 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 year ended December 31, 2013 that has been filed with the SEC and our future filings and reports with the SEC including our Form 10-Q for the quarter ended June 30, 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.
With that, I would like to turn the call over to Mr. Jayant Kadambi, Chairman and Chief Executive Officer of YuMe. Jayant?
Thank you, and good afternoon. I’ll start with the review of Q2’s financial and operational highlights. Tony will then review the Q2 numbers in greater detail, and then I’ll finish our prepared remarks with some thought on brand safety which is a topic which is top of mind in the industry press. Due to our focus on building a true platform for video brand advertising, it’s been a priority for us since our inception. We believe this focus has given us a unique ability to provide a well-lit brand safe environment for TV brand advertisers. We had a solid second quarter that rounded out a successful first half and positioned the company for continued momentum into the seasonally stronger back half of the year.
Q2 revenue was $40.4 million in line with our previously issued guidance. We continue to benefit from two key competitive differentiators seamless multi-screen delivery and campaign optimization to TV brand advertisers in their key metrics. In Q2, we again generated more than one quarter of our revenue from mobile, tablet and connected television aggregate impressions. Due to continued device fragmentation and movement of video viewership to mobile, we expect this percentage to increase in the future. We also continue to see traction with longstanding clients. We now have 90 clients with $1 million of lifetime spend with us, 31 clients with $3 million of lifetime spend and 16 clients with more than $5 million of lifetime spend with us.
Q2 adjusted EBITDA loss was $63,000, better than our prior expectations of $4 million to $2 million loss. One of the key drivers of our adjusted EBITDA performance was our continued strength in gross margin which expanded about 300 basis points both sequentially and year-over-year to 48.8%. We continue to believe the combination of our growth and strong gross margin profile is a proof point regarding the competitive differentiation of our platform. Specifically our gross margin reflects the alignment of our platform with the unique needs of our target client, TV brand advertisers. TV advertising is all about driving reach and frequency which in-turn is about scaling a campaign’s target audience.
On television, advertisers scale their audience by purchasing inventory associated with specific shows but in the digital world scaling an audience to drive reach and frequency is much more challenging especially since digital audiences are increasingly fragmented across multiple screens.
Our software and data sciences platform build TV audience segments that are strong proxies for TV show based audiences. We believe this unique platform allows us to run branding campaigns more successfully and efficiently than our competitors. In Q2, we had great success in audience guarantee campaigns which are right in our sweet spot and this is reflected in our gross margin performance.
For the first half of 2014, YuMe’s revenue of $77.7 million, increased 27% year-over-year. The first half's revenue continues to be on track to account for about 40% of our full year 2014 revenue. This is consistent with the first half seasonal trends in the prior three years.
Before Tony discusses the numbers in greater detail, I would like to review the operational highlights of the quarter. As I mentioned earlier, we saw increases in the audience guarantee campaigns in Q2 and we expect this type of buying to increase on our platform overtime. We can buy digital video. We can build digital video audience segments that we believe are strong proxies for what advertisers buy on television, audiences associated with specific shows.
For example, when an advertiser buys a show like The Voice, they are buying the 18 to 49 year old audience segment on television. With our platform we can deliver that audience across multiple digital screens and do so with confidence and efficiency to guarantee to the advertiser that their campaign is delivering valuable results. This is an important competitive differentiator.
On the international front, revenue growth remains strong and we continue to believe and invest in these markets. Europe continues to take the lion’s share of the revenue and we are also seeing good progress in Latin America markets.
In R&D, we continue to ramp up data scientist and software engineering hiring and have expanded to a second Indian office in Pune. We now have more than 90 R&D heads in India across Chennai and Pune.
We have announced an integration partnership with JW Player, the world’s most widely adopted digital video player that supports 7 billion monthly streams. Our software now brings a differentiated revenue stream and true preemptive brand safety and ad viewability to the billions of worldwide JW Video Player content streams.
We have also announced the relationship with Nielsen Catalina services which will allow our CPG clients to combine their in-store purchase behavior database with YuMe’s data science capabilities to drive multi-screen campaigns that influence future purchase behavior. We have been at the forefront in providing TV style growth rating points and audience data across multiple screens including desktop, mobile and connected television. We are pleased to have announced our integration of Nielsen’s mobile OCR measurements which will give our advertisers respected third-party measurement across both mobile and online screens.
During this quarter, we also announced the hiring of Venkat Krishnan as a Senior Vice President of Product. Venkat brings more than 20 years of experience in developing advertising, video back-office and interactive application platforms for companies such as SeaChange and Lucent-Alcatel. He is a great addition to the executive team and he is already making a positive impact on our organization.
Finally, we reached an important milestone with Video Reach, the programmatic initiative we launched in March. Video Reach enables agency and advertiser trading desks to utilize our platform programmatically. We believe our SDK-enabled curated traffic sources providing trading desks with unique benefits because our combination of technology and high touch traffic services enables cookie-independent, cross-screen targeting and higher levels of brand safety available through other trading desk partners.
I am pleased to announce that Video Reach recently signed its first major agency trading relationship and we are in the final stages of integrating with the desk buying platforms. We continue to be very bullish on Video Reach because YuMe’s capabilities are in demand at the trading desks especially in light of the recent media coverage around brand safety, ad viewability and exchange based traffic. Everything we have seen to-date reinforces our initial view that trading desk budgets are largely complementary to the budgets that run through our direct sales model. For example, we are now working with 75 of the Ad Age 100 and some of the remaining 25 we do not work with, currently are focused on the programmatic channels. We believe Video Reach will help us penetrate those Ad Age advertisers.
Our current outlook continues to exclude any material contribution from Video Reach and we will update you on our progress throughout this year. Specifically on the next call we will provide some color on our Q4 expectations for Video Reach. Before I turn the call over to Tony, I would like to address our decision to adjust our full year outlook which is summarized in our earnings press release. With two quarters of performance in the books, we are taking a more conservative approach to our outlook based on the typical lack of Q4 visibility at this point in the year.
One of the factors we consider is bookings to-date. Our analysis of 2014 annual bookings to-date relative to expected annual revenue is consistent with our 2013 and 2012 historical trends. This consistency in bookings gives us confidence that we are growing at the rate we predicted at the beginning of the year. That said, at this time of year we are essentially guiding for both Q3 and Q4 and since we have seven weeks before the start of Q4, we have limited visibility into Q4 revenue. Due to the historical volatility of the Q4 period, we feel our updated outlook is prudent and we will update you with formal Q4 guidance in November.
In summary, Q2 was another quarter of solid financial performance that further illustrates the differentiation of our platform and were demonstrating early traction on our Video Reach offering. We are positioned well to execute on our outlook and we remain confident in the strategic position of our business in the secular growth industry.
I will now turn the call over to Tony, who will review our second quarter numbers and our outlook in greater detail. Tony?
Thank you, Jayant. Revenue for the second quarter increased 18% year-over-year to 40.4 million, driven by continued traction of our multi-screen offering and our ability to optimize to TV brand metrics such as audience guarantees. Quarter two saw strong year-over-year growth in number of advertisers on our platform. We worked with 428 advertisers in the quarter, up 42% year-over-year due to customer growth in the U.S. and internationally.
Average spend per advertiser decreased 17% year-over-year to 93,000 due primarily to the strong growth in new advertisers. Note, the new clients typically start its smaller campaigns especially on newer international markets. In quarter two, our top 20 advertisers accounted for 42% of revenue compared to 49% in the year ago period which illustrates the increasing diversity of the revenue base.
For the last 12 months ended June 30th, we worked with 719 advertisers, up 37% in the comparable period year ago period. Average revenue per advertising customer was down 7% year-over-year to 229,000 which also reflects the impact of strong new advertiser growth and the associated lower spending levels.
We continue to expect customer base growth to be one of the primary drivers of revenue in the short term. We are also pleased with the way that which smaller newer customers are increasing spend with us.
Gross margin was a record 48.8% and expanded more than 300 basis points year-over-year to reflect the continued positive impact of our PQI Inventory Quality Scoring Algorithm. While we are proud of our ability to drive industry leading gross margin for the reasons Jayant described I’d like to remind you that our long-term operating target for gross margin remains 46% to 48%. Total operating expenses in the quarter increased 33% year-over-year as we continue to invest for future growth. R&D increased 65% year-over-year as we accelerated our investments in existing product and emerging programmatic initiatives.
As a percentage of revenue both sales and marketing and G&A expense decline sequentially. This how drive operating leverage in quarter one, quarter two.
Our adjusted EBITDA last with $63,000 in quarter two compared to our guidance of a loss between 4 million and 2 million just driven by strong gross margin and operating expense leverage. Our net loss per share was $0.08 in the quarter compared to a loss of $0.23 per share in the year ago period. Our balance sheet remain strong to 67.9 million in cash and cash equivalents and no debt as of June 30th. The first half of the year the company generated 4.9 million in cash from operations.
I’ll now review our quarter three and full year outlook. For the third quarter we expect revenue to be in the range of $43 million to $45 million. We anticipate quarter three adjusted EBITDA loss in the range of $3 million to $1 million which reflects our continued investment in product, engineering and international expansion. For the full year 2014 we expect revenue between $180 million to $190 million. We anticipate adjusted EBITDA to be in the range of breakeven to a $4 million profit.
In summary quarter two was solid and we are well positioned to execute on our outlook for the remainder of the year.
With that I’ll turn the call back to Jayant.
Thank you Tony. Before we take your questions I would like to share my thoughts on the subjects of brand safety and ad viewability which have been in the headlines recently.
We have said from the beginning that YuMe’s business and technology are built to serve the needs of TV brand advertisers and that these needs are significantly different from those of direct response campaigns that are transacted primarily across browser based display ad platforms. Two key areas that highlight this are brand safety and ad viewability. I see four key reasons why our brand safety approach is competitively differentiated and leads the industry.
First, we take a white glove services approach to the traffic or inventory side of our business. We have a business development team that actively manages and curates our traffic relationships. This leads to a more well the brand safe environmental customers. Second, our embedded software has been a longstanding tool for preemptively blocking bad actors. Bad actors are reality online from e-commerce to advertising but fortunately our embedded software enables us to be more proactive in testing ad and then brushing quality.
Third, we are adding to our traffic quality leadership team. We recently hired an in-house qualities are we start with proactively managing rain safety to supplemental work of our BD team and software filtering technologies. Fourth, our cross screen approach provides an inherently safer environment than broader only solutions. Since more than 25% of our business and growing is generated than smartphone and tablet apps and on connected television and these screens to-date are not expose to the brand safety and viewability issues seen in computer base video sessions.
In short we believe our unique approach positions YuMe as the leader in brand safety. No one else in the industry has this combination of high touch services, technology and cross screen diversification.
In summary we had a solid Q2 and we believe we are well position to execute on our outlook for the remainder of the year. We are starting to see strength in the area of audience guarantee campaigns and we believe our audience segmentation and brand safety capabilities are clear differentiators that are reflected in the company’s revenue and margin profiles.
Our Video Reach programmatic offering showing early success with trading desk and we’re in a strong position overall to proactively manage brand safety for all our clients based on our unique approach of applying proprietary technology and services.
Thank you for your attention. And we’ll now take your question.
(Operator Instructions) Your first question comes from the line Ross Sandler from Deutsche Bank. Your line is open.
Ross Sandler - Deutsche Bank
Thanks guys. Just had three questions I guess I’ll go one at a time. First is I guess Jayant can you give us some color on the guidance so I think regarding 22% growth for 3Q the mid-point and 17% implied for 4Q at the mid-point, you got a tougher account in 3Q and then I guess easier 4Q. So taking that in concert with what you just said in the prepared remarks can you just give us some color on what’s causing that variation in growth, and then what's happening within the client base to explain that 3Q and 4Q cadence?
Sure I hope you’re doing well Ross. As I’ve said before I think we’ve been fairly regular in saying we don’t look at the business growth on a year-on-year, quarter-over-quarter perspective, we look at it annually on a full year calendar year basis and we urge everyone do the same. So when we’re trying to look at our business internally, we’re not saying Q4 is decelerating from Q3 from 22 to 17 or in this quarter Q2 decelerated from Q1 which was actually 40% growth. We sort of look at it because of the way that our business works on a full year continuum. So the particular guidance on Q3 is reflective of where we are in the quarter. We’re more than half way into the quarter and we have a bookings pipeline as we talked about and both historical and current data on both pipeline and close rates and things like that, that gives us the visibility into the quarter and so we have our usual confidence with which we give you the Q3 numbers. As we talked about our business is not annualized revenue recording business we have less visibility into Q4. We’ve looked at historical measures and we’re tracking our business to yield the growth rate.
And so the way we provided the Q4 full year version of our guidance based on the less visibility we have seven weeks earlier into the quarter turned out to be a lower growth rate and I think that’s prudent because of the volatility in Q4. So to summarize we didn’t look at it on a quarter-to-quarter, year-over-year growth rate decline.
Ross Sandler - Deutsche Bank
The second question is so I think the industry growth rates are around 30% if you include both programmatic and direct and, the blended average for this year for you guys I think will be, low to mid-20s. So have you thought about potentially compressing the gross margin to drive additional growth? Is there elasticity in doing that, or is that not -- can you not flex that type of a lever? And then I got one last follow-up at the end.
Well, I think there is a couple of comments here which are relevant there. I think we’ve been very, very careful about preserving and because I think this is what our clients want and it’s slightly different than I think in general the digital advertising industry, because of our client base being the [indiscernible] 100 and a very small group of advertisers relative to everybody else, there has been a very strong push from the beginning for brand safety well live environments and that viewability and things like that. So we have been reluctant to reduce the quality of the inventory and/or the price to support the needs of more DR focused advertisers who are less worried about where the inventory is coming from and more worried about the click.
So what you’re seeing reflected in the business is that I think more than anything else. I think as we -- I think there is a tendency to think that as we enter the programmatic business and we’ll give you guidance on how the programmatic business is doing from the revenue standpoint and in the Q3 call there is the tendency to believe that the programmatic business will be lower value business lower margin business and lower growth for CPM business. So we currently think that, that’s not the case for that as well that is just our buyers pushing them will be buying programmatically and they buy those channels and any efficiencies gained from that will be passed through to them, but fundamentally we think the margin is high because of our ability to essentially find the male who is 19 to 49 watching The Voice better than other people.
The last thing I’ll say Ross on that topic is, generally speaking we have not seen because of the type of buyer we have and this is very different than the DR business, we have not seen a direct linear or non-liner correlation with 10% price decline and a 10% increase in revenue.
Ross Sandler - Deutsche Bank
Yes, that makes sense, okay. And then the last question and then I’ll turn it over to the queue. I think you guys just said that the top 20 advertiser growth rate was flat year-on-year. So can you just give us a little more color about why that's tracking flat? And can you talk at a high level about sales force productivity and, the stability of the sales force? And that’s it for me. Thanks, guys.
Yes, I mean we have -- you didn’t ask the question but it’s sort of conjunctionally related, we have very little turn in our business from our advertiser base, there is no turn. And on a quarterly to quarterly basis you saw this in December when we talked about it and an advertiser because of various product launches didn’t advertise as much in the December quarter and came back in the January quarter. It’s hard to provide these measures sort of up in to the right consistently on a quarterly basis based on advertising spending patterns for brand advertisers. So, they vary on a sort of standard deviation basis, they vary a lot on a quarter-to-quarter basis.
So, the other thing to look at is if you recall we have always had an advertiser mix where we had a 10%, 15% customer. You will see in the Q that we release tomorrow or the day after that we no longer have a 10% customer. So, there has been a substantive decline in one particular set of one customer in the pharma industry that is skewing the top 20% customers to make it look flat. So, absent that customer, the top advertisers are spending more.
Your next question comes from the line of Kerry Rice from Needham. Your line is open.
Kerry Rice - Needham
Thanks a lot and you may have kind of already just addressed one of my questions in that. Q2, you are in the top line guidance of your previous guidance for Q2, 40 million to 42 million, came in at a little bit lower level I think than what the expectation was. Was that related to this 10% customer maybe not spending as much, was there anything on your side that you could point to that maybe was a little bit weaker? And how do you think about the guidance in Q3 was kind of above where people expected, so are those -- whatever happened in Q1 maybe that came in weaker, is that going away in Q3 or can you give us some thoughts about that?
So, of our top 20 customers, we've had one customer whose spending has declined, I think because they have essentially had their own reduction in marketing spend that’s unrelated to our business. So, the issue with that customer I think will remain for the next few quarters at least. We don’t expect spending from that customer to come back, so relative to, I mean the way you are looking at it, the strength if you will in Q3 is unrelated to that customer coming back, it’s just we believe related to the fact that we are doing very well in sort of audience guarantee, audience segments and cross-platform targeting.
As to why we were a $1 million or $2 million short relative to consensus or relative to the top end of our range in Q2, I think it's not related to -- we can’t point to a particular event, it’s just related to the volatility in this business that's the back end of the quarter on how campaigns deliver and when things come in or not which is one of the reasons our guidance is a $2 million instead of narrowing more than that as you would expect this late in the quarter.
Kerry Rice - Needham
Just a couple more, your customer wins have really -- have accelerated and look really good. If I think about the new customer ads, is there anything that you are doing differently to help accelerate that or a lot of these international as you expand there. Can you provide any color on that?
That’s a good question, Kerry. I think there is two sets of answers to that and you've hit on both of them. One is, we are continuing to aggressively expand internationally. I think the same. We run this business as a global business. We tailor the product a little bit to the international markets but fundamentally advertising on television is advertising on television everywhere in the world and so the product platform technologies are valid everywhere when we have a global footprint of ad impressions. So, the advertising budget in smaller countries are just smaller to start and there is a different set of advertisers, so you are seeing new customer growth from international markets just rise. We are very, I think Tony mentioned this in his prepared comments, we're happy with the fact that there is movement from small customers to becoming large customers.
We are unable to generally say, once we got a customer today by tomorrow or the day after, it will become a big customer. The time taken to go from small to large is sort of varying but we are confident in the fact that we don’t lose any customers. They will become large at some point, so we take heart in the fact that as the customer start growing that eventually they will become large customers and our efficiencies will increase dramatically. The second part of your question in United States, there are just like in television, the large advertisers will advertise on primetime and there is a lot of advertiser advertise on Monday afternoon as well with smaller budgets and we are starting to penetrate those a little bit as well in the United States. But I think primarily, the growth is coming from international customers.
We have had good expansion in what we call our western market which includes Texas and Dallas and sort of Denver and sort of Midwestern states as well where we have smaller advertisers that advertise on TV sort of regionally. So, we've seen a little bit of that as well.
Kerry Rice - Needham
And then finally on the competitive dynamics, are you seeing any change there? Obviously Facebook bought LiveRail which is more of an exchange video. But I don’t know if you can comment on that, or any industry dynamics that maybe have changed over the quarter?
So specifically speaking about platform technologies and ad tech technologies, I will make the point here that we’re the only independent ad tech sort of platform for ad serving left with LiveRail going to Facebook, Adtech going to AOL, and Freewheel some time ago going to Comcast, there is fundamentally, DFE sitting at Google, one could argue we’re the only independent out there especially in light of all the data issues and privacy issues that people are worried about. So from that standpoint we think the dynamics are helping us for our ability to get more and more software embedded in our inventory so we can make better decisions.
In terms of the -- we talk to it in terms of the market dynamics around ad viewability and brand safety and things like that just to reiterate what I said in my prepared remarks we have been -- because of our business we have been looking at this very carefully and we built the system to support that. We feel very good about that and I think you will see us take more and more of a leadership position and a thought leadership position in the market regarding how to keep brand safe well in environment for customers.
Your next question comes from the line of Gene Munster from Piper Jaffray. Your line is open.
Gene Munster - Piper Jaffray
Good afternoon and Jayant, you talked a couple times here about the international opportunity and the customer growth. Can you remind me just how we should think about that in terms of percentage of revenue over the next, 12, 24, 36 months, just kind of there is a big picture how big it potentially could get?
So I think in the last filings of our we reported international revenue was just over 10% or 11% or so of revenue of total revenue so it’s coming of a pretty small base it’s growing pretty quickly so relative to overall growth it’s going pretty quickly, how you should think about it in 24, 36 month we think it will approach 20% of the business or so 25% of the business. I think the wild card there frankly is how well we do in China and perhaps India because those two markets have very, very large spends but if you just take the existing businesses that we have we got them around 20%, 25% of revenue in two to three years.
Gene Munster - Piper Jaffray
And is there any considerations in terms of profitability that we should be thinking about as we think about international growing faster than the domestic business?
No, I mean our businesses, we fundamentally run one business all the platforms, sorry, all the ad sales and media volume comes through one platform and the business model across all different geographies is the same, it’s run off of our software, it’s run on a revenue share basis as opposed to a fixed price media basis and so we’re relatively insulated from the difference in a TV ad in India versus a TV ad in the United States versus a TV ad in UK pricing, so even if the pricing is $10, $20, and $30 from a margin perspective, we're relatively insulated. And from an operational expense standpoint we are leveraging the same organization outside of sales and business development for all of that. So I would answer in general that’s not how we think about the business as separate countries or separate geographies with separate P&Ls we look at it as one big business sharing OpEx space.
Gene Munster - Piper Jaffray
Okay. That’s helpful. And the final question is on Video Reach you said stay tuned to next quarter where you will give a little bit more insight around it. Can you at least say this that you think it’s going to be measurable on 2015? I know you’ve tempered expectations about the slope of the takeoff of it. And can you entertain some more measurable revenue in 2015 or just wait till next quarter for more details?
Yes, I mean I’ll be more positive about it here than in my prepared remarks in the sense that we've basically staged the whole product development cycle, the sales cycle and our business for Video Reach getting ready for 2015. So that’s the way we’ve looked at it internally.
Your next question comes from the line of Mark May from Citibank. Your line is open.
Mark May - Citibank
Thanks. I think most of my questions have been asked, but maybe around just the top line outlook. I think at the low end of your guide the second half growth is around 14%, and the Q4 is 9%, and I guess the question is, as you look out beyond the second half of the year, is there anything that you have happening sort of incrementally from what you are doing today that where we could think about growth rates that are north of that as we head into 2015? Thanks.
First, I will reiterate, we really, really don’t look at it from the growth rate from Q4 of last year to Q4 of this year. We'd urge you to look at it as growth rate across the year which we are guiding to the mid-20s in the current guidance.
In terms of what we think could be accretive for next year as we look out, I think we have maintained regularly that we believe that there will be significant contribution from the programmatic side of the business going forward and we continue to think that the combination of our direct business and the complementary nature of programmatic business will turn into a pretty good annual growth rate next year.
There are no further questions at this time.
Thank you again for your interest in YuMe. We remain confident in the fundamentals of our industry and our business. We continue to believe we are participating in a huge market that’s undergoing shifts in audience behavior and that our unique technology and services approach will enable us to become a leading aggregator for TV brand advertisers that want to capitalize on the market secular changes. We hope to see you at upcoming investor conferences and appreciate your continued support. Thank you.
This concludes today’s conference call. You may now disconnect.
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