Qumu Corp's (QUMU) CEO Vernon Hanzlik on Q1 2018 Results - Earnings Call Transcript

Qumu Corp (QUMU) Q1 2018 Earnings Conference Call May 2, 2018 10:00 AM ET

Executives

David Ristow - CFO

Vernon Hanzlik - President, CEO & Director

Analysts

Jeffrey VanRhee - Craig-Hallum Capital Group

Ryan Vardeman - Palogic

Operator

Good morning. My name is James and I will be your conference operator today. At this time, I'd like to welcome everyone to the Qumu First Quarter 2018 Conference Call. [Operator Instructions]. Thank you. I'd now like to introduce CFO, Dave Ristow. Mr. Ristow, the floor is yours.

David Ristow

Good morning and thank you for joining our first quarter 2018 earnings conference call. Our comments today may include forward-looking statements related 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 risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Risks and uncertainties associated with our business are described in our most recent Annual Report on Form 10-K. Any unreleased features or services referenced in this presentation or other 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 that their decisions are based on features that are currently available. We assume no obligation to and do not intend to update any forward-looking statements.

Now, I turn the call over to Vern.

Vernon Hanzlik

Thank you, Dave, and welcome everyone. In Q1 we began to see a strong momentum towards our goals. This included a surge in customer opportunities, new strategic partnerships from around the globe and we received and continue to receive accolades from both the media and industry analysts. This new momentum is not yet reflected in our numbers. With that in mind, first quarter revenue was $4.8 million compared to $6.7 million in the first quarter of 2017. First quarter adjusted EBITDA was a negative $2.9 million compared to a negative $1.9 million in the first quarter of 2017. Please note that since the beginning of our first quarter to close, Qumu has secured a $2.2 million total booking with a major healthcare provider in the U.S. With that said, I'd like to highlight some of our exciting things currently underway at Qumu. Last quarter I outlined changes in executive leadership and planned our -- the plan our team developed in direct efforts going forward.

This new leadership in place and a focus plan, there's new energy and excitement at Qumu which is drawing interest from both customers, industry influencers. Our plan is working. Today, I'd like to report on our progress in each of the 4 strategic pillars in our plan. The first pillar is sales execution and new customer growth. Our key objective within the first pillar is to increase our sales opportunity and our pipeline and of course drive more of those opportunities to final sale. In fact the new healthcare customer that I just mentioned is a great example of the entire team working together with tenacity and efficiency from the Qumu marketing generated lead to our sales team closing this large complex deal within a quarter. Under the new leadership of our VP of Marketing, Eric Rudolf, who also joined us in May last year; we have significantly increased both the quality and quantity of our inbound sales leads.

The focus of this team for the first 10 months has been lead generation, media relations, digital marketing and analyst relations and these efforts are already producing impressive results. Our volume of inbound opportunities has increased significantly. Our pre-sales pipeline has never been stronger. In addition, our media and analyst relation efforts have resulted in Qumu receiving a number of industry honors and awards. The most significant being the 2018 Competitive Strategy Innovation and Leadership Award from Frost and Sullivan, one of the leading analyst firms covering the global enterprise video platform space. Over the last 10 months Qumu has received awards, honors, industry featured articles relating to unified communications, collaboration technology, online video and Bring Your Own Device technology.

And just recently, we launched a new live webcasting series called Video Visionaries; fantastic line of education, thought-leading webcast that will give our customers and prospects an opportunity to learn and get to know Qumu experts better. Our new EVP of Worldwide Sales and Business Development, Chance Mason, and his team are aggressively advancing our direct sales and channel operation processes while expanding our ecosystem of resell partners. In the first quarter we added 5 new customers, 1 of which was a unique hybrid solution with flexible enterprise deployment capability. In regards to direct sales, I mentioned our growing pipeline. These opportunities are converting to sales and pipeline additions represent a mix of deployment types including on-prem, cloud and hybrid. We are also doing more with existing partners such as AT&T, British Telecom, V-cube, Pexip and Pinnaca; who are making deeper commitments and working directly with us on lead generation.

I want to take a minute to highlight 1 particular partner this month, our Japanese partner V-cube, who represents a perfect fit for our channel strategy which is focused -- which is to focus our partners and provide dual advantage both of geographic reach and vertical market opportunities. First, they provide distribution and delivery across Japan. V-cube has become an expert in selling Qumu's solution with a video-centric unified communication opportunity within their base of large enterprise customers. We've been working with V-cube for about 18 months. They already represent 13% of our base. Second, through their subsidiary iStudy, Qumu gained deeper access in the corporate education vertical market. During the first quarter of 2018, iStudy integrated their Learning Management System product with the Qumu platform and launched a new iStudy LMS and an iStudy video product, which powered by Qumu Cloud as a content delivery and management engine.

As a direct result of this launch, we expect to continue to see increased revenue from our Japanese partner V-cube and iStudy's partnership. Given the success we've had with this model, we are aggressively growing our channel and expanding Qumu's reach within new regions and vertical markets with additional new partners. Just this week we announced a new strategic partnership with Compodium, a leading unified communications provider headquartered in Stockholm. With a strong vertical especially in eHealth and virtual healthcare, Compodium dramatically expands distribution for Qumu enterprise video platform in EMEA particularly in the Nordics, Benelux, DACH, U.K., Middle East and Africa regions. We hope to be signing our first joint customer deal with Compodium soon. I'd also like to highlight our partnership with ConvergeOne.

ConvergeOne is a leading IT services provider, collaboration and other technology solutions with more than 7,200 large and medium size enterprises. They are a great fit for Qumu because they have customer relations and trusted provider of complex solutions deploying on-prem, hybrid and cloud delivery models across the full spectrum of industries. We've also added Chenega, a key federal government reseller with numerous active opportunities underway with various agencies within the U.S. government. Chenega is an 8a star partner employing more than 5,000 employees and operating in 61 locations in 23 states in the Continental U.S. as well as Afghanistan and Korea. The federal government represents a great market opportunity for Qumu. Chenega gives us a trusted and proven point of access and they are committed to an annual sales target.

And finally AVI-SPL, an integrator of audio, video collaboration solutions for 85% of the Fortune 100, integrated its video ReadyCam product with the Qumu X platform. ReadyCam is a TV quality video studio designed for the C-suite. The ReadyCam video studio simplifies video production for internal communications or for broadcast media outlets during a live TV network appearance. The second pillar of our 2018 strategy is customer success and retention. Keeping our customers happy and loyal is not only a top priority, it's a competitive advantage for Qumu. Our renewal rates remain high at 85% and we continue to see expansion of our base. Including significant potential revenue from an existing healthcare customer this year, customers choose to stay with Qumu because we understand the complexity of the enterprise and our full stack platform addresses their ongoing needs for on-prem security and delivery plus the option to add cloud and hybrid deployments as needed.

But the number that really influences prospects are consistent rankings and reviews in the Gartner Peer Insight website. These rankings and detail comments independently verified by Gartner are from real customers sharing their experience with Qumu's outstanding customer support and product quality. One of the most powerful ways in which we engage with our customers is we also connect them with each other is through our annual customer summit held in New York and London. These are being held in May 15 in New York and on June 7 in London. Beyond these events, our new dedicated account managers are personally meeting with each of our top 50 customers during the first half of 2018. The third pillar of our 2018 strategy is Market Force product innovation. As most of you know, we launched the Qumu QX enterprise platform last year. We now have the most extensible and scalable solution in the industry.

The X in QX stands for a convergence of key elements of a true enterprise grade video platform that no other competitor provides. It's the only solution that works inside and outside the firewall and as a hybrid plus our open, partner friendly platform provides a single software solution in them for capture, delivery and video management. During the quarter we made numerous product innovation improvements as we continue to advance our lead on the enterprise grade security, performance and user experience. The open service based architecture of our QX platform makes it highly extensible and therefore easy for Qumu and our partners to build product extensions and integrations plus our platform is GDPR ready for our growing customer base in EMEA. For example, in Q1 we added support for WebRTC, IPTV and Advanced Analytics. These major enhance for the QX platform and significantly extend our competitive differentiation as most of the comprehensive solution available and create new opportunities for upselling to our existing customers.

Let me expand on this a bit. WebRTC, which stands for web-based real-time communication relatively new standard developed by Google, it's gained tremendous momentum because of its replacement of flash of browser-to-browser and application-to-application live communication over the web and doesn't require a plug in. Advanced Analytics provide IT and business leaders with actual insight both in the network and the user level. This is really important because it gives IT and communications teams a full picture of an end-to-end video experience from anywhere in the world on whatever device they choose to analyze it on. We are uniquely qualified to bring it all together via 1 seamless full stack enterprise platform QX and we are doing it every day. The fourth pillar is strengthening our financials. We are shoring up our balance sheet while investing in the future. Our ongoing expense management is on plan, compensation has been aligned with adjusted EBITDA performance and finally, cash is well managed.

Now over to Dave for further financial commentary.

David Ristow

Thank you, Vern. I will comment on a few of our financial highlights. During the first quarter, the company closed a $10 million credit agreement with ESW Capital. After repayment of the outstanding principal, interest, fees and expenses associated with the refinancing; the company increased net cash by $805,000. Cash and cash equivalents totaled $6.6 million as of March 31, 2018 compared to $7.7 million as of December 31, 2017 reflecting the first quarter operating loss offset by cash proceeds from refinanced debt and changes in working capital. Total headcount was 106 as of March, 31, 2018 compared to 121 as of December, 31, 2017 and 145 as of March 31, 2017. Additionally, in the first quarter the company took action to reduce annualized non-headcount related cost by approximately $1.5 million. BriefCam Limited, in which the company has a $3.1 million investment reported in the company's consolidated financial statements at cost basis, recently announced 100% revenue growth in 2017.

It also announced the release of its next generation video content analytics platform and receipt of Security Today's 2018 Platinum Govie Award for video analytics. Total revenue was $4.8 million for the first quarter compared to $7.2 million last quarter. Software license and appliance revenue was $451,000 for the first quarter compared to $2.0 million last quarter. The decrease in software license and appliance revenue was primarily due to the seasonality of software license sales in which the fourth quarter is typically the strongest quarter. Subscription, maintenance and support revenue for the first quarter of 2018 was $4.0 million compared to $4.8 million for the first quarter of 2017. It was negatively impacted in the quarter by approximately $184,000 from the adoption of the new revenue recognition standard ASC Topic 606 as well as the loss of a large customer representing approximately $800,000 in revenue in the first quarter, which was previously announced as lost in Q4 2017.

Gross margin was 56.3% for the first quarter compared to 65.7% last quarter. Gross margin for the first quarter was 56.3% compared to 61.5% for the first quarter 2017, was unfavorably impacted by fixed amortization associated with prepaid royalties for embedded OEM licenses and lower perpetual license revenue in the quarter. Moving on to operating expenses and adjusted EBITDA, a non-GAAP measure. We continue to diligently manage our expense structure. We significantly improved our operating expenses as well. Compared to the corresponding periods last year, total operating expenses decreased by 10.4% for the 3 months ended March 31, 2018. Adjusted EBITDA was $2.9 million for the 3 months ended March 31, 2018. The company's financial guidance for the full year 2018 remains unchanged. Core bookings growth is expected to be 25% in 2018. Revenue is expected to be approximately $25 million. Adjusted EBITDA loss is expected to be approximately $3.5 million. The company further expects to achieve adjusted EBITDA positivity in the fourth quarter of 2018.

Vern, I'll turn it back over to you.

Vernon Hanzlik

Thanks, Dave. Qumu's opportunity is helping customers converge their complex video environments into 1 intelligent platform. We're the only solution provider in the industry offering a full stack set of deployment models. The enterprise environment is incredibly complex and Qumu has solved the most complex placeable inside the firewall. We are developing it where we developed our intelligent streaming technology. This is a huge hurdle for pure cloud play vendors from a technology standpoint and from a sales and support standpoint. In our full stack solution, we can solve customer problems with a straightforward cloud solution and moving inside the firewall or by starting inside the firewall and then moving to hybrid deployment all with a single platform.

We simplified the complexity making the enterprise video easy and seamless for IT and for the users. We're now capitalizing on that position focusing on our 4 strategic pillars for 2018. There's a new energy and excitement at Qumu. We made great progress on our plan. Our new seasoned leadership team is in place and aggressively implementing our plan. We have a robust pipeline that is driven out of our strategy. Our existing and new strategic partnerships around the globe are getting new opportunities and our approach is igniting interest in our [indiscernible] industry influencers.

I'll open the call up for questions.

Question-and-Answer Session

Operator

[Operator Instructions]. First question comes from the line of Jeff VanRhee from Craig-Hallum.

Jeffrey VanRhee

Just a couple from me. Maybe just from a number standpoint, can you talk through what you think Q4 run rate might be based on the revenue guide you've given with respect to just subscriptions? I'm just talking to subscription line and I realize you've got some unpredictable in there based on bookings of prem versus cloud. But how are you thinking about that subscription line from here through the end of the year? That's my first question. And then the second, I think you had suggested EBITDA positive by Q4, is that also free cash flow positive and along those lines with cash flow, just your thoughts on cash burn between here and there?

Vernon Hanzlik

So Jeff, on the subscription line, you're looking for where our run rate will be above where we're stating in the $4 million right now. Is that correct?

Jeffrey VanRhee

Right. Just trying to get a sense of the trajectory that you're thinking of that aligns with your guidance of revenues.

Vernon Hanzlik

I don't know if we -- do you have that?

David Ristow

Jeff, our current run rate is about $4 million. So, it really depends upon the mix of deals coming in between now and the Q4. Vern touched on the fact we got a large U.S. healthcare provider that we secured here in the month of April. Big deals like that will contribute more fully whereby we do more hybrid and/or cloud deals. That deal mix is going to have a significant impact essentially on what Q4 run rate on that subscription line would be. So I don't want to lead you to an answer because as we go ahead and go at the market, we're seeing demand in all areas, but it's not absolutely predictable at this moment as to what that mix is going to fashion out to be.

Vernon Hanzlik

Jeff, just I know you're looking for a specific increase so you can benchmark that growth piece on both -- all of those. Right now in our pipeline, it's -- 50% of our pipe is still either expansion our existing base or new on-premise deals, which equate to the maintenance piece which would increase that subscription but the other balance is hybrid and the cloud stuff and that varies depending on the size of them. The hybrid deals or the ASPs on them are north of $100,000 because we have the delivery piece on that. So, I think we'll have better clarity as we get through the end of Q2 on where we're trajectoring based on the close rate of some of the stuff and then how our partners are kind of influencing that because we see the partnerships as I was noting picking up. So, that number -- the subscription number will -- they're gravitating more to cloud and hybrid than they are behind the firewall solution and we're seeing more direct engagement with our enterprise product behind the firewall.

Jeffrey VanRhee

Okay. And then just your thoughts on cash flow.

David Ristow

So from an adjusted EBITDA perspective, we're definitely projecting positive there. From a free cash flow basis, we're pushing to go ahead and get ahead of breakeven there, but it's going to be close, Jeff.

Jeffrey VanRhee

And your thoughts of cash burn between here and there?

David Ristow

I think from a burn perspective, it's manageable. I mean I think it's apparent from the work that we've done here in this quarter to go ahead and control that cash burn, make sure that we've done what needs to be done from our refinancing of the debt and then additionally with deals like what was announced with that U.S. healthcare provider and then additionally what we see in pipe today, we've got adequate cash at this point.

Jeffrey VanRhee

Okay. And I guess just last from me. As you were outlining your key initiatives, it sounds like early in the year making sure you touch your top 50 accounts. Just any thoughts at this point as you look at your -- say your top 10 accounts around churn; you uptick, downtick, steady, any risk of loss in the top 5, top 10 customers?

Vernon Hanzlik

Steady on top 10. I think, Jeff, what we're finding in visiting these customers that they are not understanding the full vision of what QX is and we're getting opportunities of just coming out and meeting with these people and focusing on that and that's an effort that Chance has been leading with his team. We've focused the sales teams around account management where we're just going out and meeting with them, make sure they understand the horizontal aspect of the platform. We're just getting new opportunities that are coming because we're just sitting down and making sure we understand where we are and we're talking to new people. So I think from a retention perspective, it's steady state and then it's adding new and then expanding them. We're going to have some that fall off, but it's because we're not -- we haven't educated them. So, I would say that's more where we're at right now with that.

David Ristow

I think, Vern, just to bolt on to that a little bit. Our customer summit that's forthcoming, that top 10 that you're focusing on, Jeff, we've -- if they're not speaking, they're largely attending. I can't say all at this point because we're still taking registration, but we've got a significant component of them participating actively with us in the session.

Operator

[Operator Instructions]. Your next question comes from the line of Ryan Vardeman from Palogic.

Ryan Vardeman

How do you see revenue ramping between now and the end of the year?

Vernon Hanzlik

It's going to be on that mix, Ryan. We're seeing, we've -- obviously we just announced the healthcare deal that came in early here before the call so we want to get it out in front of everybody. That's a behind firewall on-premise thing. So we have several of those in the pipeline, which will increase revenue within the quarters and then we've got also strong sort of a SaaS thing. So, I think the ramp is going to be determined when they fall in what quarter so it will be -- as always, it'll be. That's why we kind of went through this annual guidance because of the lumpiness. But we -- sort of the steady state of those on-premise ones will affect the revenue and how much it goes up.

Ryan Vardeman

Okay. The healthcare deal -- on-premise deal, can you break out what kind of license, maintenance and services would be as it relates to that particular contract and when that contract is going to fall to the revenue line?

David Ristow

So Ryan, we'd be happy to. I mean ordinarily where we can disclose we would. This particular contract we got very strong confidentiality provisions wrapped into it and so as a result, we can't disclose the innards of that agreement, but we can disclose that it's a perpetual on-prem.

Vernon Hanzlik

And will take some revenue within the quarter.

David Ristow

For sure. The revenue that we'll take in the quarter, Ryan, will be perpetual license, we'll have services and implementation and the maintenance streams will start.

Ryan Vardeman

Okay. And then you talked about BriefCam in your prepared remarks as well as in the press release. Can you talk a little bit more about kind of the timing kind of what your perception of value is on that particular asset and when we might expect to monetize to the extent that that's still something that you're looking towards?

David Ristow

I think that we're just -- I think that we don't know the timing right now, Ryan. I think that what we are seeing is the momentum of that business and that's what we're reporting. I mean we do get a lot of questions on that particular investment and we see that their activity is -- will determine the timing and when potentially we can monetize that. But I would say that they've got a lot of great things going on with the business that they reported publicly and we just wanted to make sure people know that asset that's on our balance sheet has good value.

Ryan Vardeman

Okay. And then to meet your EBITDA guidance for the year, is that reflective of additional cost cuts?

David Ristow

Ryan, I think what we're doing at this point is culling the bottom from a cost cutting perspective. I think everything we put in place at this stage with the business and it's been a lot of change for us and I think we're trying to make this a very -- as positive as we can as difficult as these cost cutting measures can be. But we're culling the bottom on the cost cuts. What you will see trickle through the P&L though, some of these cost cuts and I'll give you one example just to illustrate. We're downsizing our offices in San Bruno to right-size it for the staff that we have there. Those cost savings will materialize in the P&L beginning in Q3. And so as we work forward on the year, you'll see additional reductions in OpEx and it's related to things that we've put in motion that will materialize throughout the balance of the year.

Ryan Vardeman

Okay. I guess the final one would be is there any -- I know that this new credit arrangement is covenant lite, but to the extent that are you comfortable with the headroom that you've got as it relates to that and are there any particular provisions that you're concerned about between now and year-end?

David Ristow

The answer is we're completely comfortable with where we're at this stage. Vern reported what renewal rates were and I think that they are only getting better with the work that we're doing with our customer success initiatives and the balance of the covenants that we have, there's plenty of headroom across all of them at this stage.

Operator

And with that, I'd like to turn the call back over to President and CEO, Vern Hanzlik, for some closing remarks.

Vernon Hanzlik

I want to thank everybody for taking the time today. Have a great day and we'll talk to you next quarter.

Operator

This concludes today's conference. You may now disconnect.