Qumu's (QUMU) CEO Vern Hanzlik on Q4 2016 Results - Earnings Call Transcript

| About: Qumu Corporation (QUMU)

Qumu Corporation (NASDAQ:QUMU)

Q4 2016 Earnings Conference Call

March 01, 2017 10:00 AM ET


Vern Hanzlik - CEO

Peter Goepfrich - CFO


Jeff VanRhee - Craig-Hallum

Glenn Mattson - Ladenburg Thalman

Mark Argento - Lake Street Capital


Good day ladies and gentlemen and welcome to the Qumu Fourth Quarter 2016 Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]

I would now like to introduce your host for today's conference, Mr. Peter Goepfrich, CFO, you may begin.

Peter Goepfrich

Thank you, Vicky. Good morning and thank you for joining us for our fourth quarter 2016 earnings conference call. With me today is Vern Hanzlik, President and CEO of QUMU.

Our comments today may include forward-looking statements relating to our expectations, plans and prospects. These statements are based on information available to us at the time of this presentation and by their nature involve risk and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements.

Risk and uncertainties associated with our business are described in our most recent annual report on Form 10-K and any subsequently filed periodic reports on Form 10-Q. Any unreleased features or services referenced in this presentation or public statements, are not currently available and may not be delivered on time or at all.

Customers who purchase our products or services should make sure their decisions are based on the features that are currently available. We assume no obligation to and do not intend to update any forward-looking statements.

I now turn the call over to Vern.

Vern Hanzlik

Thank you Peter, good morning everyone and thank you for joining us for our fourth quarter 2016 earnings conference call. I'd like to make a few comments before Peter reviews the numbers for the year and the fourth quarter. As I commented on our press release 2016 was a pivotal year for Qumu and our fourth quarter illustrates our strong progress in key areas. I'd like to highlight a couple of firsts of our business as we transition to becoming a pure Software as a Service or SaaS company.

First in the fourth quarter we achieved positive adjusted EBITDA of $800,000. Second, we reached the gross margins of 71% for the quarter and 61% for the year. During 2016 we continue to focus on strengthening our financial performance and growing the business with new and existing customers. As I mentioned in the release we've reduced our operating expense base by $20 million over the last year.

Based on our strategies and speed of transition within our target markets we downsized employees and operational expenses. With an eye to the future we maintain investment in research and development at the right level plus investing in customer success to drive high retention rate and expand our customers. I'll discuss some of those developments later. In sales and marketing we focused on maintaining the right size of team that would ensure the balance of our two-pronged strategy; one, continue serving enterprises with complex global video needs and two, through business development and partnerships expand our base of customers employing our cloud and hybrid solution.

This balanced approach is working, our top 10 existing customers accounted for 69% of our revenue in the fourth quarter. These enterprise customers represent some of our largest vertical markets, financial, technology, manufacturing and pharmaceutical. Meanwhile 80% of new customers for the fourth quarter were deployed in the cloud with potential to grow into hybrid enterprise customers. While we saw 8% decrease in revenue year-over-year, we saw a 13% increase in gross profits -- strong gross margin of 61% for the year which is a 12% increase over the 2015. We expect this trend to continue in 2017 and into 2018 as we pivot our company.

Annual revenues decreased from light new bookings in Q2 and Q3 of 2015 which we communicated last year as we saw transactions being pushed into later in the year. We subsequently closed two of those large transactions in Q4 each being north of 1 million in bookings for the quarter. The first deal was with one of the largest airplane manufacturers in the world and the second was a large global financial and credit company. The sales cycles for these transactions took over a year to close.

Additionally, as noted in our press release following a long deployment and penetrations of our software in one of the most secure banks in the world, we obtained a signed off in that international banking institution. This institution represented 1.6 million in catch-up revenues for the quarter both in software and services. Deployments within these types of institutions will grow as enterprise video becomes more progressive and companies adopt broader used cases than ever before.

Other new transactions for the quarter Johnson & Johnson, United Utilities, Boots Walgreens these deals were all cloud hybrid competitive wins with great growth potential. Geographically, the Americas and EMEA markets continue to show adoption in the fourth quarter for our enterprise video platform. The American market represented 78% of revenue and EMEA market was 20% of our revenue for the fourth quarter.

We signed 30 new blue chip customers in 2016. 80% were cloud and hybrid customers with the balance being largely enterprise on-prem transactions. This is line with our core strategy land-and-expand by penetrating new customer opportunities with cloud and hybrid solutions while addressing the complex needs of the world's largest businesses with our best in class on-premise video platform.

In APAC, we made solid progress developing our pipeline into our new partnership with VQ, which represented 15% of our new cloud bookings in 2016. APAC represented 2% of our revenue for the year and we expect the APAC market to gain momentum in 2017 with our VQ partnership.

We closed 50% of the 100 opportunities within new and existing customers that we were tracking for Q4. From a booking perspective the mix of deployment models within the fourth quarter were as follows. 50% on-prem, 45% cloud and 5% hybrid. At this moment in time our pipeline coverage is around 2 times coverage. However large transactions especially in healthcare, financial or defense are challenging to predict when they will close and they have the potential to be pushed. This could be due to timing the industry events or purchasing processes that we cannot control. With that in mind in 2017, we will continue to be more conservative in our forecasting.

Our ability to serve these complex environments is what makes the business both rewarding and challenging at the same time. In 2016 our forecasting improved, but we have room for further improvement and in 2017 we'll continue to communicate our pipeline progress. In 2016 our global renewal rates for maintenance and support, firm contracts and SaaS contracts were greater than 90% both enterprise and cloud customers. Also our customer satisfaction scores were the highest in the company's history at an 98% rating.

For financial commentary I'll turn the call over to Peter and then I'll come back and review some strategies and some market comments before we open for questions. Peter.

Peter Goepfrich

Thank you, Vern. I'll comment on a few additional items. Total revenue was $9.3 million for the fourth quarter compared to $7.1 million last quarter. Software license and appliance revenue was $1.9 million for the fourth quarter compared to $1.2 million last quarter. The increase in software license appliance revenue was primarily due to increased software license sales. Subscription, maintenance and support revenue was $6.2 million for the fourth quarter compared to $5 million last quarter. Professional services and other revenue was $1.2 million for the fourth quarter compared to $1 million last quarter.

The fourth quarter of 2016 revenue included subscription, maintenance and support revenue of $1.2 million and professional service revenue of $0.4 million, a previously deferred revenue contingent upon a customer's acceptance, which was received in the fourth quarter. Going forward subscription, maintenance and support revenue related to this customer is expected to be $300,000 annually. In 2017 we expect that software license and appliance revenue will continue to be dependent on large on premise sales which are difficult to forecast and that subscription, maintenance and support revenue will grow steadily from a quarterly base of approximately $5 million at the end of 2016.

Gross margin was 70.7% for the fourth quarter compared to 59.8% last quarter, the benefits to gross margin related to the previous noted customer acceptance was 6.1% and 1.8% for the fourth quarter and full year 2016 respectively. Total gross margin percentage is expected to improve from the low 60s early in the year to high 60s late in the year. Total gross margin will continue to be impacted by the timing and mix of large on premise sales.

Moving on to operating expenses and adjusted EBITDA, a non-GAAP measure. We've right sized our expense structure over the past six quarters on a similar revenue base, significantly improving our operating results and adjusted EBITDA compared to the corresponding periods last year, total operating expenses decreased 35% and 34% for the three and 12 months ended December 31st, 2016.

Adjusted EBITDA improved $4.5 million to income of $0.8 million for the three months ended December 31st, 2016 and adjusted EBITDA improved $17.8 million to a loss of $6.6 million for the year ended December 31st, 2016.

Now for the balance sheet. Cash in investments were $10.4 million as of December 31st, 2016 compared to $4.6 million as of September 30th, 2016 reflecting the fourth quarter operating loss and impact on cash from changes in working capital and the term loan net proceeds of $7.5 million received in the fourth quarter. Cash at the end of the first quarter is expected to be in the low to mid $9 million range. As it relates to additional first quarter guidance revenues expected to be in the range of $7 million to $8 million, gross margin is expected to be in the low 60s, net loss is expected to be in the range of $3.6 million to $3.1 million or a loss of $0.39 and $0.34 per diluted share with an weighted average shares outstanding of approximately 9.25 million shares.

Adjusted EBITDA is expected to be in the loss range of $2.2 million to $1.7 million compared to adjusted EBITDA loss of $3 million in the first quarter of 2016.

Now, back to Vern.

Vern Hanzlik

Thanks Peter. Let me review some of our key operational highlights and comment on market and product strategies. Then we'll open the call up for questions. Industry analyst underscore the growing opportunity in our market, two key points resonated with us. As the infrastructure grows demand grows with video enabled end-points firmly in place and network connectivity gradually increasing in video design networks. The need for live and recorded video content is growing by 5 times each year. Managing all types of video has become a top enterprise priority. We see more evidenced of growing demand for video content management's and the need for solutions to support their demand.

Qumu's core opportunity hasn’t change, deliver the leading enterprise end-to-end platform, build with a service based architecture and deployable on-premise in the cloud or as a hybrid. With that said we know the deployment model is shifting over the next two years towards cloud and hybrid. We embrace this shift to the cloud over two years ago and now are seeing the benefits of those investments starting to play out. However, at this time in our defined market customers are still investing on-premise software for the enterprise for video solutions. The actual pace of investments in cloud video solutions for the largest enterprises in the Forbes Global 2000 is proving to be gradual.

Our opportunity has given customers a choice our unique value is that we understand the enterprise customer world, plus we bring a deep expertise in complex video deployments. With that in mind during 2016 we delivered our first phase of our next generation hybrid architecture and have deployed it in new and existing customers. Next comes the key phase in our product strategies. In Q2, we will be rolling out a new modular and open architecture to our Pathfinder video delivery system. This brings Pathfinder's best in class secured delivery intelligence to our own cloud offering giving customers both power and flexibility in hybrid deployment models. Plus partners will have maximum ability to innovate, create new market opportunities, develop products and extensions for our Qumu platform.

On the business development front, as we discussed we are creating a new class of services for the Qumu platform. We are enabling our partnered community to extend our core strengths into new applications and new vertical markets. Some examples of these solutions will be adjacent technologies like learning management or IPTV applications. Another example, of our strong focus on integrations with Pexip, video, Skype-for-business, Citrix VDI desktops, and social business platforms, like Jive and Yammer for video creation and collaboration. Finally, SharePoint, Microsoft 365, offer opportunities for us to add value beyond the enterprise integrations. We will continue to see strong pipeline and new opportunities collectively from these integrations and from new partners as we expand to 2017.

We maintain our focus on expanding within the Forbes Global 2000 equipment companies which represents a huge market size of 8.7 million employees and 51% of the world's GDP. The opportunity for us is clear to see the number of Qumu customers already in the Forbes Global 2000 list. Qumu's customers represent approximately 4% of the top 1,000 companies, 10% of the top 500 companies and 19% of the top 100 companies on the Forbes list. Through our account based marketing initiatives we're building new content, refreshing our website, developing channel marketing for our partners and 45% of our target companies are engaged with us, we'll provide new opportunities with current and new customers.

As I mentioned earlier we've continued growth in some of our largest existing enterprise customers for the fourth quarter; 69% of our revenue in the fourth quarter came from our top existing customers. Large on-prem deals both in the fourth quarter and moving forward give us balance for revenue and cash flow as we transition the company to SaaS over the next couple of years. Following our land-and-expand strategy we grew new customers with majority of those transactions been our cloud offering giving us great opportunity for growth. Also we remain confident in our ability to continue our transition matching the pace of the market shift to more recurring revenue and a lower reliance on perpetual license sales over time. During this transaction we'll stay focused on providing the best video platform for our enterprise customers both existing and new with our defined market.

In summary, we're managing the business with multiple strategy for customer's success involving our video platform and improving operations in 2017. We look for more growth as we move into 2018. Our growth for 2017 will primarily be new sales bookings and we anticipate 30% to 40% growth in both SaaS and perpetual sales bookings in year-over-year basis. Video communication is and will be the largest communication medium that will impact business over the next five years. And Qumu is well positioned to take advantage of that opportunity.

Now, we would like to open the call up to questions.

Question-and-Answer Session


Thank you. [Operator Instructions] And our first question comes from the line of Jeff VanRhee with Craig-Hallum, your line is now open.

Jeff VanRhee

Several for me, I guess Vern just that last data point I missed that you said you're looking for SaaS and perpetual bookings growth of?

Vern Hanzlik

30% to 40%, Jeff.

Jeff VanRhee

And then, so take me through the sort of the dichotomy here if you will, the guide embeds sort of a flattish, maybe some modest low single-digit growth. I know you've talked about this change in the account based marketing approach and it sounded like maybe six months ago or so maybe three to six months ago you had maybe a 2x increase if I remember right, I think there was some number sort of in that ballpark of lead, it sounds like you had a lot of momentum there. So with the SaaS and perpetual bookings growth of 30% to 40% and the lead gen site really ramping, how does that translates to single-digit revenue growth, I'm caught between the two here?

Vern Hanzlik

I think the key is it's the mix between the on-prem transactions we got in the pipeline Jeff and what's SaaS because the SaaS if you look at the opportunities that are coming are more SaaS which are more ratable and that mix between some of the larger on-prem which are the ones that we kind of -- the timing of one of those come in, kind of creates the balance of how we convert. I think it's about, if we look at bookings, if it is 50% of the revenue is going to coming in within the year when it comes in and then the timing on that. So it's really a mix of the balanced between SaaS and on-prem and how that converts to revenues.

Peter Goepfrich

Jeff, just to add-on to it, there is a couple of headwinds we have coming of last year, there is that customer acceptance we pointed out which we planned on, but it increased kind of the run rate on recurring revenue a little bit higher than it would normally be. So that's 6.2 million subscription business we'll really rolling into next year with $5 million. So you see a delta there and then the fall off in on-prem sales during 2016 are impacting the professional services run-off in the next year by about almost another $11 million [ph]. So there is a couple of headwinds we're facing because of those kind of events based IMs coming out of 2016. So the growth isn’t as strong as one would suggest compared to what the actual sales will be on revenue.

Jeff VanRhee

Is that the midpoint of the revenue guide? Can you give me maybe a little better sense than of -- I mean are you looking for at least double-digit growth from subscriptions whereas licenses and services fall off somewhere of a more like 20%-25%. I mean some semblance of how that's going to look?

Peter Goepfrich

Look the subscription maintenance business is more going from that 5 million base to call it 6 by end of year. So you had a 20% growth factor there just looking at those two numbers. And then on a professional services base, we're not -- we don’t plan on doing the $4 plus million we did this year. We think it will start increasing towards the tail end of next year -- of 2017. But you are looking at more like a $3 million number for the year. And then your delta is the timing on on-premise deal which should be roughly $6 million to $9 million in revenue.

Vern Hanzlik

Yes, and when we don’t have those larger on-prem deals Jeff, the PS obviously falls off, but I mean when we have them it's there and actually other software even in the on-prem is getting more predictable of how we're deploying it, even in these more complex environments.

Jeff VanRhee

And talk if you would, you touched on -- obviously you've got the Pathfinder coming out, but you've been pushing more aggressively to the land and expand approach you mentioned that a number of times. And then I think you also at the same time said some of these larger deals that had been delayed had roughly one year cycles. So I'm wondering you've got the very, very large deals that have really long cycles, but I guess outside of those deals. Can you help to quantify or help us gauge where you are in that transition to the land-and-expand, it doesn’t look like the velocity is there yet. So just help me understand where you are in that transitional land-and-expand?

Vern Hanzlik

Well, I think the key is as it were, we're trying to get the account basis that we're selling the cloud and the hybrid, so we've got people that we're expanding that already have cloud, so there will be Pathfinder add-ons to those for hybrid delivery which is s revenue opportunity.

Then there is just net new customers coming in that two of the wins that I mentioned last quarter both Boots Walgreens and United Utilities were competitive wins because we had hybrid offering and they were going to start with cloud than they were expand to the Pathfinder add-on because they'll have delivery that way so. And I think that from our perspective as we go in a drum beat of adding those cloud customers are expanding in our defined market and even if it's out of the Forbes 2000, people will come in and we'll tell the story.

So I think that price point, where we start in that organization in telling the broader story is really where we're seeing the opportunity and then on the large enterprise these are just, we've got multiple proof of concepts going on right now, the timing of the closing of those varies, but these are in organizations that have over 50,000 employees and these are going to be on-perm and it’s a proof of concept, it's a deployment, it’s potentially competitive against one or two examples, like the airplane manufacturer that was against two competitors; it took us you know a year-long to deploy that. It was a heavy proof of concept it was 90 day just, about contract negotiation those types of things.

So that's sort of the balance that we're trying to work through and we're seeing those lands being either departments that were telling the right story, like the Johnson & Johnson one which is just departmental, but there'll be -- now we're working with multiple spots in the world and getting horizontal in these bigger accounts with the land because it maybe a budgetary type buy versus a IT buy which is really our larger on-prem opportunities.

Jeff VanRhee

Okay, and then I guess this last from me, if I look at enterprise video adoption in total, which use cases are really seeing adoption? Namely, both those that you can address as well as those that you can't. You know the, I think you made in your prepared remarks some reference to enterprise adoption maybe being slower than expected. Is that across the board or are there particular use cases where they're actually really consuming a lot of video and other use cases where they're not. Maybe just slice that a little thinner if you would?

Vern Hanzlik

Sure, so the biggest use cases that we see inside the firewalls is live, and live and video-on-demand, so it's basically recording of either executive communications and then we go to video-on-demand from there, and managing those flows into whether they're these social networks that I described we're seeing a lot of momentum with social commuting and digitization of that, these are projects that are just kicking up. But the main use cases right now are live and video-on-demand and then we're plugging into some existing portal and then providing the creation side of our application which is creating video within sight of these things and once we turn that on we start to get a lot more adoption.

And that might be six months after you put the initial platform rolling out, we have one large insurance company right now that they’ve got over an 18 month deployment and they still haven't turned on user generated content yet because they're just not ready and it becomes a security issue. So it’s timing and evolution of those large corporations how they're feeling about it and I think the timing now because of the consumer side of the thing is going to drive the adoption inside, but I think the security governance is going to be where everybody's going to be watching this, even in some of our other applications around the unified communications, like I mentioned Skype for business which is a big growth area, managing those meetings and what the compliance issues are.

So these things are going to evolve over the next couple of years, how big these repositories are going to get for video and that's where we see -- we keep locked in on that opportunity, but live and video-on-demand are where we're kind of getting the deals over the line right now.

Jeff VanRhee

Okay, great, thank you.


And our next question comes from the line of Glenn Mattson, Ladenburg Thalman. Your line is now open.

Glenn Mattson

Can you say is there any of the Top 10 customers coming up from for a renewal in 2017?

Vern Hanzlik


Glenn Mattson

Okay, and so how do you feel about that. Is it -- are you comfortable that the -- is it open up to new competitors or is it just the matter of renegotiating terms and then you expect to increase the size of those deals or maintain them, what's your thought process?

Vern Hanzlik

Yes, I think well I think mainly, Glenn, we -- renewals is one of the things we are focused on in they have retention piece because once you get the network in place as far as taken out, but the key for us is expanding. We still see it in our numbers getting a lot of revenue in lot of our base, we continue to do that with more extensions and more touch points as we get more horizontal and then sometimes it's the level of report that they want their might be a renegotiation or might not I think our job is as I mentioned in my comments 98% customer sat in our customer success group which is noteworthy historically with this business that we've been working hard on over the last couple of years. So I think the renewal piece is, continue to work on that, get horizontal in these accounts and look for the opportunities where we can grow and that's some of the biggest opportunities we have in our base.

Glenn Mattson

Okay, and that pipeline coverage 2x was it I believe it was more like 3x or coming into the quarter, so maybe you converted faster than you grew the pipeline, can you just talk about that do you have enough resources chasing new stuff or what's the dynamics there?

Vern Hanzlik

Well, we've got about 15 people both in account management and BDR type work. So if you look at our quarter caring people I mean we're trying to continue to fill the pipe in that 2x to 3x we want it to be more in the 3x, but I wanted to comment on our current pipeline and coverage that we have. So I think that for me it's just the conversion of that pipeline and the timing on that, because of some of those are larger on-premise deals and the timing of those vary, but we're continuing to see new opportunities in our account base marketing of this focus that we have with these 2,000 accounts that were chasing. We've got 15 to 25 contacts within those and those are just -- and we're tracking that very effectively so it's just continuing to fill the pipeline and look for the opportunities in timing and see which type of investment the company is going to make, whether it's an IT investment that's larger or it's a typical used case, where people want to put things up or create content video content or just mange it.

Glenn Mattson

Okay, and then I guess and lastly, I'm just kind of wondering about if they are -- if the market -- I mean we ask this most quarters, but if their marketplace has got any changes in the competitive landscape?

Vern Hanzlik

Not in our defined market, it's a normal suspect that we see within the analyst community.

Glenn Mattson

Okay, great. Thanks guys. Good luck going forward.


[Operator Instructions] Our next question comes from the line of Mark Argento with Lake Street Capital. Your line is now open.

Mark Argento

Just couple of quick ones here. So previously you guys have been working with some channel partners, curious if you guys have gotten any incremental traction with any of those partners or are you guys kind of pivoting back to more of a kind of direct sale model.

Vern Hanzlik

For the larger transactions, Mark, it's our enterprise reps working those transactions. We do have some there in our pipeline that we're working in conjunction with AT&T that you know are significant, but we also have some new partners that new SIs that are entering the fray of working with us on some go to markets that will, as soon as get those signed we'll announce those. But the bigger SIs, this particular one video is one of their top five initiatives to kind of bring a platform to market, we're working very closely with them.

So that is similar to what the progress that we're seeing, I noted it in the our Asia-Pac with [indiscernible] they've got a very focused team of our product. They've got it integrated with some of their offerings on the video conferencing side, which is proving to be beneficial, they've got their support groups. So there it's kind of taken on a life, that's why we'll see some more opportunities coming on Asia-Pac with that partnership.

And then, the ones that we started last year with Unified Communications, with Pexip and Skype for business are two big opportunities that we see where new partners are reliant and leverage up our platform and then I discussed a little bit about what we're doing with Pathfinder and we see people building applications on top of our Pathfinder technology. So more diversified opportunities and just kind of opening up our architecture which will help.

Mark Argento

It's helpful and then I think you guys have made some enhancements to the sales leadership side of the house? Any new initiatives that you guys have put in place, you know with those changes?

Vern Hanzlik

We're evaluating on the business development side, is where we're going to be adding some functions you know Michael's been on board for about five months and he's evaluating some strategies, we're doing -- I think the key is how do we continue to get to the 3x coverage on our pipeline and get more predictability as everybody has setback us as far as how we kind of move the business forward. So we're making changes to you know the right areas within the sales team, the balance between a business development account management and our enterprise reps and then making sure that the partners we’re bringing into the fray that are committed and that you know we can monetize and show success there.

Mark Argento

One quick one for Peter in terms of the way you kind of lay the year out, obviously got the full year guide, but when you look at your cash and cash burn, where do you see cash all those kinds of troughing at, you got comfortable with where you are at right now in terms of balance sheet?

Peter Goepfrich

Comfortable with where we're at right now, typically I love to see the below point would be end of second quarter, third quarter just because the general timing of the business and working capital moves, typically that's the kind of the below point.

Mark Argento

Great, thanks guys.


And I'm showing no further questions at this time, I would now like to turn the call back over to Vern Hanzlik for closing remarks.

Vern Hanzlik

Well, we want to thank everybody for joining us today, and if you have any follow up questions please contact us directly and we will talk to you next quarter, thank you.


Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. And you may all disconnect. Everyone have a great day.

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