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Edited Transcript of BCOV earnings conference call or presentation 26-Jul-17 9:00pm GMT

Thomson Reuters StreetEvents

Q2 2017 Brightcove Inc Earnings Call

Cambridge Aug 13, 2017 (Thomson StreetEvents) -- Edited Transcript of Brightcove Inc earnings conference call or presentation Wednesday, July 26, 2017 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew W. Feinberg

Brightcove Inc. - Acting CEO, President & COO

* Brian Denyeau

ICR, LLC - SVP

* Gary E. Haroian

Brightcove Inc. - Chairman

* Kevin Rhodes

Brightcove Inc. - CFO

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Conference Call Participants

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* Glenn George Mattson

Ladenburg Thalmann & Co. Inc., Research Division - VP of Equity Research

* Jeffrey Parker Lane

Stifel, Nicolaus & Company, Incorporated, Research Division - Associate

* Lee Krowl

B. Riley & Co., LLC, Research Division - Associate Analyst

* Nick Altmann

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Presentation

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Operator [1]

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Greetings and welcome to the Brightcove Second Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to Mr. Brian Denyeau of ICR. Thank you, Mr. Denyeau, you may now begin.

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Brian Denyeau, ICR, LLC - SVP [2]

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Good afternoon, and welcome to Brightcove's Second Quarter 2017 Earnings Call. Today, we'll be discussing the results announced in our press release issued after market close today. With me on the call are Gary Haroian, Brightcove's Chairman of the Board; Andrew Feinberg, Brightcove's acting Chief Executive Officer; and Kevin Rhodes, Brightcove's Chief Financial Officer.

During the call, we will make statements related to our business that may be considered forward-looking and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements concerning our financial guidance for the third fiscal quarter of 2017 and the full year 2017, expected profitability, our position to execute on our go-to-market and growth strategy, our ability to expand our leadership position, our ability to maintain and upsell existing customers and our ability to acquire new customers. Forward-looking statements may often be identified with words such as we expect, we anticipate, upcoming or similar indications of future expectations. These statements reflect our views only as of today and should not be reflected upon as representing our views as of any subsequent date.

Statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations. For a discussion of the material risks and other important factors that could affect our actual results, please refer to those contained in our most recently filed annual report on Form 10-K and as updated by our other SEC filings, including our most recent quarterly report on Form 10-Q filed today.

Also, during the course of today's call, we'll refer to certain non-GAAP financial measures. There is a reconciliation schedule showing GAAP versus non-GAAP results currently available in our press release issued after market close today, which can be found on our website at www.brightcove.com. In terms of the agenda for today's call, Andy will provide a summary review of our financial results and market opportunity as well as an update on our operations. Kevin will then finish with additional details regarding our second quarter 2017 results as well as our guidance for the third quarter and full year 2017.

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

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Andrew W. Feinberg, Brightcove Inc. - Acting CEO, President & COO [3]

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Thanks, Brian, and thanks to all of you for joining us today. Before I review our second quarter performance, I would like to take a few minutes to discuss today's announcement that I have been appointed acting CEO following David Mendels decision to step down as CEO and Director of the company. David has been instrumental in establishing Brightcove as the industry's leading online video platform, and he leaves the company with the strongest product portfolio in our history. On behalf of all of us at Brightcove, I would like to thank David for his many contributions and to wish him well and all the best in the years to come.

My focus will be on executing the company's strategic plan with a particular focus on taking our go-to-market execution and operations to the next level. We've done a terrific job over the past 2 years in building the next generation of our Video Cloud architecture and in bringing numerous innovative solutions to market that deliver real business value to media, digital marketing and enterprise customers. Innovation, reliability and serving the business needs of our customers remain the core of Brightcove's DNA, and I am excited about our current product portfolio and our future product road map.

Our market opportunity has never been stronger. Video is having a profound impact for all companies, whether they are media companies adapting to new consumer viewing habits and business models or digital marketers or enterprises looking to increase engagement, conversion or employee communications. Brightcove is very well positioned to serve as true domain experts in partnering with companies that are looking to leverage the power of video in their business. We now have the robust products and service offerings and the organization to build a repeatable high-velocity selling model.

In my prior roles with the company, I have built and led our Asia Pacific organizations. The successes that we have had in recent years in Japan, Australia, New Zealand, Singapore and other countries in the region demonstrate that our approach to strategic sales and serving as trusted advisers resonates with customers as they learn how to build digital businesses and solutions with video. We've also seen our North American digital marketing team make real strides in customer acquisition and retention. Further incorporating these learnings and practices into our other regions will be a top priority in our go-to market approach going forward. Equally, I believe that we have substantial opportunity to bring increased operating discipline and focus on productivity as we go forward. There is no question that we have a world class roster of customers and we have a great team. In summary, I'm very excited about our position and our opportunity at Brightcove, and I believe we are very well positioned to deliver reaccelerating revenue growth in 2018 and beyond.

Turning to our second quarter results. Revenue of $38.8 million was $1 million above the high end of our guidance range and was primarily driven by higher-than-anticipated overages resulting from increased customer usage and from professional services. Non-GAAP loss per share of $0.16 was modestly below our guidance range. From a bookings perspective, we had another solid quarter and remain on track to achieve our mid- to high-teens bookings growth target for the full year of 2017. In particular, we had a strong quarter in our Asia Pacific media business. New logo activity in our North American digital marketing and enterprise business was also strong.

Our bookings performance demonstrates that our expanded product portfolio is increasing our sales opportunities as customers recognize the business value Brightcove can deliver. Our focus in the coming quarters is on building upon this progress as our sales team continues to ramp and as we drive improved productivity from the investments we have made in our sales and marketing organization over the past year.

During the quarter, one of our strategic customers launched a large-scale OTT offering. While our technology worked as it was designed, 2 third-party providers, which formed a part of the overall solution, struggled to deliver at peak demand. As a result of this unanticipated issue, we made the strategic decision to invest additional resources to mitigate these shortfalls in order to support our customer. This was the right thing to do from a customer and from a long-term business perspective. But in the interim, we encourage significant unexpected expense.

Due to our investments and to modifications made by one of the third-party providers, the customers' OTT service is now stable and performing as expected. Based on what we have learned from this experience and through extensive additional testing, we are enhancing our offering by replacing one of the existing third-party infrastructure providers. We are confident in this enhanced approach. In the short term, however, this will lead to higher-than-anticipated cost of goods sold during the remainder of 2017. We believe that margins will return to expected levels beyond 2017 as costs normalize.

Based primarily on these investments and related costs, we are adjusting down our full year profitability outlook on the low end of the range by approximately $4 million. Operating at this level of loss is not acceptable to me. Returning the company to predictable and sustainable performance and driving improved productivity will be a major area of focus for me as CEO. We still intend to return to adjusted EBITDA profitability in the fourth quarter. And for several reasons, I am confident we will achieve that goal. First, we understand the underlying drivers that caused the increased expenses in Q2. The large majority of the unanticipated expenses on the cost of goods sold side related to the situation just described relating to our customer launch. As indicated, those costs are already in the process of being normalized over the remainder of the year. Most of the increases in OpEx, which Kevin will discuss, are either unforecasted onetime occurrences or items which are controllable and to which I'm committed to controlling.

Second, we have already identified several additional opportunities for reducing costs and increasing the efficiency and productivity of the company without impairing long-term growth. I believe we will be successful in these endeavors. We will give you an update on our progress in this area on our next earnings call. Returning to consistent double-digit growth remains the top priority for the company. I'm confident that we will get back there during 2018, and that by taking these steps, we will do so profitably.

During the second quarter, we also continued working through the media pricing reset related to the commodity elements of our bundled solution that we discussed in our last earnings call. Our media customers and prospects have recognized the increased value offered by our new technologies, like Dynamic Delivery and like Context Aware Encoding as well as our updated pricing packages. We remain confident that our $10 million to $13 million estimate properly captures the size of the pricing reset and that we will have worked through this issue by the end of the first quarter of 2018.

As we move into 2018 and put this issue behind us, we anticipate that we will be able to return to and improve upon our historical revenue retention rates. This is a key component of our strategy to return to double-digit revenue growth in 2018. Revenue growth will also be driven by continued strong bookings growth, including meaningful contributions from our new enterprise video suite, increased adoption of other new offerings, which I will cover here in just a moment, and the increased value of our multiyear contracts and the associated revenue contribution to both of our media and digital marketing businesses.

As I mentioned earlier, our product and engineering organization continued to do great work bringing new innovations to market. During the quarter, we introduced many exciting new solutions at our annual PLAY conference, which we have built into one of the premier video-focused gatherings in the industry. For media customers and prospects, we announced an updated version of our live module at PLAY as well as new server-side ad insertion technology and Context Aware Encoding, which leverages sophisticated machine learning algorithms to enable high-quality viewing experiences, while at the same time minimizing file size and thus bandwidth and storage costs. These products are helpful to fulfill our Media Manifesto's vision of providing experiences that delight our customers' audiences to drive new revenue opportunities and to reduce costs. Our Q2 results validated these investments as we signed customers such as The Africa Channel, AsiaNet News Media and Entertainment, Entravision, Football Federation Australia, Foxtel, Madison Square Garden Networks, Major League Soccer, Masterclass, Republic World, RugbyPass and TV Asahi. And for those of you who enjoyed the live streaming of the U.S. Open in June, we were honored to have powered that as well.

For our digital marketing customers and prospects, we also had several exciting product announcements at PLAY, including the introduction of our enterprise initiative. This initiative includes new products and partnerships to empower our customers to make video a mainstream communication medium across all parts of their organizations, including internal trading and corporate communications to name a few. We also announced In-Page Experiences, a new template driven capability that enables business users to quickly and to easily create dynamic video experiences without the need for IT or coding resources.

Our enterprise messaging has resonated well in the market. In the second quarter, we signed Under Armour, Avon, Boston Children's Hospital, Konica Minolta, Masterclass, Navy Federal Credit Union, SAP and The Vitamin Shoppe. In connection with this initiative, we also signed material agreements with a number of other well-known brands, including one of the world's largest consumer electronic companies and a major global cosmetics manufacturer.

In summary, Brightcove has made good progress against many of its key strategic initiatives. We are on track to achieve our bookings growth target for the year, and we have made good strides working through our media price reset. We have a great product portfolio, and we are focused on enhancing our go-to-market productivity to drive improved growth and sustained profitability over time. I am excited to take on this new role and to lead the incredible team here at Brightcove. We have great products, clear market leadership and an amazing opportunity to deliver tremendous value for our customers and our shareholders.

With that, I'll turn the call over to Kevin to review our Q2 results. Kevin?

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Kevin Rhodes, Brightcove Inc. - CFO [4]

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Thank you, Andy, and good afternoon, everyone. I'll begin by discussing our second quarter results and then finish with our third quarter guidance and updated outlook for the full year 2017. Total revenue in the second quarter was $38.8 million, up 5% from $37 million in the second quarter of 2016 and above the high end of our guidance range.

Breaking revenue down further. Subscription and support revenue was $35.5 million, which was up slightly compared to $35.1 million in the year-ago period. Professional services revenue was $3.2 million in the second quarter, which was driven by several large OTT projects. The revenue outperformance in the quarter was also driven by overages, which were $500,000 above our forecast, and the professional services, I mentioned earlier.

Now let me add some color around our revenue mix. On a geographic basis, we generated 57% of our revenue in North America during the quarter and 43% internationally. Breaking down international revenue a little more, Europe generated 16% of our revenue and Japan and Asia-Pac generated 27% of revenue during the quarter. From a vertical perspective, our media business represented 56% of our revenue in the quarter, and our enterprise business represented 40% of our revenue, while volume represented the remaining 4%.

Now let me turn to the supplemental metrics that we share on a quarterly basis. Our reoccurring dollar retention rate in the second quarter was 91%, which was in line with our target range of low-to-mid 90s and was modestly above our expectations for the quarter. We were pleased to see our retention rate return to historical levels in the second quarter, particularly in light of the pricing reset headwinds that are currently affecting our media business. That being said, we do anticipate our retention rate to be at or slightly below our normal range for the remainder of this year as we work through those headwinds.

Our customer count at the end of the second quarter was 4,304, of which 2,079 were classified as premium customers. We were pleased with our customer acquisition activity during the quarter. Looking at our ARPU, within our premium customer base, our annualized revenue per premium customer was $71,000, which was up 2% year-over-year and excludes our entry-level pricing for starter customers, which averaged $5,000 in annualized revenue.

Looking at our results on a GAAP basis. Gross profit was $22.2 million, operating loss was $7.9 million and loss per share was $0.22 for the quarter.

Turning to our non-GAAP results. Our non-GAAP gross profit in the second quarter was $22.8 million compared to $24.1 million in the year-ago period, and represented a gross profit margin of 59%.

Subscription and support revenue represented approximately 92% of our total revenue and generated 65% gross margin in the quarter. Our second quarter gross margin was negatively impacted by 2 items. First, the proactive decision that we made during the quarter to invest incremental infrastructure resources in support of a strategic customers' OTT launch to offset performance issues from other third-party vendors. This decision had an impact on subscription margin.

Secondly, we also diverted professional services resources in this launch effort and had to utilize higher cost third-party resources to backfill work being done on other projects, which weighed on our professional services margin.

Professional services margin is also being impacted in the early part of the third quarter, however. We believe these services margins will return to normal levels in the fourth quarter. As Andy indicated, based on what we've learned from this launch, we are making architectural changes to ensure that our third-party providers can effectively scale alongside our platform and our customers' needs. This will weigh on profitability in the second half of 2017, but we will see leverage again in early 2018 as these costs subside.

Non-GAAP loss from operations was $5.5 million in the second quarter compared to non-GAAP loss from operations of $302,000 in the second quarter of 2016. Non-GAAP loss from operations was modestly below our expectations due to the items I just mentioned surrounding the launch of our customers' OTT service.

I would also like to remind listeners that our second quarter is generally our largest marketing expense quarter of the year. This year's PLAY Customer Conference was the most successful in our history, and we incurred higher-than-forecasted marketing and related expenses as a result.

Adjusted EBITDA was negative $4.3 million in the second quarter compared to positive $885,000 in the year-ago period. It was impacted by the same items I mentioned earlier.

Non-GAAP loss per share was $0.16 based on 34.2 million weighted average shares outstanding. It was modestly below our expectation and compares to a loss per share of a $0.01 on 32.8 million weighted average shares outstanding in the year-ago period.

Turning to the balance sheet and cash flow. We ended the quarter with cash and cash equivalents of $28.4 million. During the second quarter, we used $119,000 in cash flow from operations, with $818,000 in capital expenditures and capitalized internal-use software. Free cash flow was negative $937,000 in the second quarter.

I'd now like to finish by providing our guidance for the third quarter and our updated outlook for the full 2017. We now expect revenue to be in a range of $152 million to $155 million, which represents year-over-year growth of approximately 1% to 3%. This includes approximately $10.5 million to $11 million in professional services revenue.

In terms of profitability, we are lowering our full year non-GAAP operating loss to a range of $11.8 million to $13.3 million, and adjusted EBITDA to be a loss of $7 million to $8.5 million. In addition, we now expect non-GAAP net loss per share of $0.34 to $0.39 based on 34.4 million weighted average shares outstanding.

For cash flow, we expect full year negative free cash flow to be in a range of $11 million to $12 million. This equates to negative free cash flow over the remaining second half of the year to be $2.5 million to $3.5 million.

For the third quarter, we are targeting revenue of $37.5 million to $38.5 million, including approximately $2.5 million of professional services revenue. From a profitability perspective, we expect a non-GAAP operating loss of $3.2 million to $3.7 million, and an adjusted EBITDA loss of $1.9 million to $2.4 million. Non-GAAP net loss per share is expected to be in a range of $0.10 to $0.11 based on 34.5 million weighted average shares outstanding.

And with that, we'll now take your questions. Operator, we are ready to begin Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Tom Roderick of Stifel.

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Jeffrey Parker Lane, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [2]

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It's actually Parker Lane in for Tom. You've had some really nice success in Japan and Asia-Pac recently. I was wondering if you could comment on the demand trends you are seeing in the region. How your go-to-market strategy differs there from maybe United States and Europe? And whether or not some of the deals that you've won in the regions have been more of an organic greenfield situation or displacements of competitors?

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Andrew W. Feinberg, Brightcove Inc. - Acting CEO, President & COO [3]

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Sure. Hi, Parker, thanks for joining the call. Appreciate it. Yes. We have had a lot of success over recent years in Japan and Asia-Pac, and we're really proud of that. You asked several questions in there, I'm going to try to remember them all but ask it again if I miss it. Maybe taking the last one first, are they greenfield situations? It's really both. There have been large opportunities where we've displaced existing vendors. There have been head-to-head competitions and, certainly, we've also helped companies develop their strategies and launch new initiatives. And so we're really proud of all of those. Some of our go-to-market there is very successful because we develop long-term relationships with the customers. We build up trust over the years with customers, our people are domain experts and they take a long-term solution selling approach to these engagements, and that's why we've been so successful. I may have missed one of your questions. Forgive me, if I did.

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Jeffrey Parker Lane, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [4]

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Yes, that mostly covers it. And then on the starter front, it looks like you guys have grown that business, on a customer basis, about 100% year-over-year. Is that a function of signing larger customers to these engagements? Or is it really just growing some of those early seeds that you had there on that front?

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Andrew W. Feinberg, Brightcove Inc. - Acting CEO, President & COO [5]

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I'm not sure I'm answering your question, but we had a very strong quarter in our starter business in North America this past quarter. And so we've seen some real growth there and we're excited about it.

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Operator [6]

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The next question is from Glenn Mattson of Ladenburg Thalmann.

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Glenn George Mattson, Ladenburg Thalmann & Co. Inc., Research Division - VP of Equity Research [7]

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Curious about -- you mentioned the cost cuts that you've seen. Can you talk a little bit about where you've seen those, the cost-cutting opportunities? And roughly speaking, what kind of magnitude you're talking about? Is it kind of just getting you back to where you were historically? Or is it above and beyond that? And how is it that they came to light at this point in time and we hadn't seen them earlier?

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Andrew W. Feinberg, Brightcove Inc. - Acting CEO, President & COO [8]

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Sure. Glenn, thanks for joining the call and appreciate the question. Look, as I said in the prepared remarks, the operating losses that we're looking at are not acceptable to us. And we think we have a tremendous long-term opportunity in front of us. We've got the best products and services in the market with a world-class roster of customers. And we're not okay with the operating losses as they're running. And so it's about the long term, the short term and some basic blocking and tackling. In the long term, what we're talking about are scale optimizations and efficiencies. We're talking about completing infrastructure projects, which we have had underway but we need to complete. It's about driving to a more valuable revenue mix, getting more value out of our software. And as we talked about before, getting past the commodity elements and this pricing shift that we're talking about. In the short term, we're selectively looking at different changes to drive efficiencies and productivity and variable expenses that don't impair long-term growth. And in terms of blocking and tackling, look, it's implementing business processes and controls that ensure that we hit our budget.

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Glenn George Mattson, Ladenburg Thalmann & Co. Inc., Research Division - VP of Equity Research [9]

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Okay. But nothing as far as the -- that you mentioned, Andy, about kind of the size of the -- and the scope of the plan?

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Andrew W. Feinberg, Brightcove Inc. - Acting CEO, President & COO [10]

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Forgive me, not sure of what your question is.

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Glenn George Mattson, Ladenburg Thalmann & Co. Inc., Research Division - VP of Equity Research [11]

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The magnitude of the cost cuts, basically.

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Andrew W. Feinberg, Brightcove Inc. - Acting CEO, President & COO [12]

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Sure. So we have a plan for the second half that's reflected in our guidance. And our goal is to hit that plan, and we're going to try to beat it.

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Glenn George Mattson, Ladenburg Thalmann & Co. Inc., Research Division - VP of Equity Research [13]

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Okay. And as far as the search for a permanent CEO, can you go into a little bit about that? Is it -- are some of the outside forces that have been agitating at the company, are they going to have a voice in this process at all? Or maybe you can talk about how you expect that process to unfold?

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Andrew W. Feinberg, Brightcove Inc. - Acting CEO, President & COO [14]

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So I'm here with our Chairman, Gary Haroian. I'm going to let him answer that question.

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Gary E. Haroian, Brightcove Inc. - Chairman [15]

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Thank you. We have -- we kicked off a search. We have an international search company involved. They'll hit the ground running basically tomorrow. We've been working with them for a while. Certainly -- we'll certainly entertain any potential candidates that any of our shareholders may want to present. We're certainly not against taking a look at any good candidates. We're really looking for somebody with a seasoned track record at executing a growth strategy. We have, of course, a complete spec beyond that, but that's, at a high level, what we're looking for. And I do want to take this opportunity to say how fortunate we are to have Andy Feinberg here at Brightcove. Andy has been with the company for 12 years. He's done a lot of different things. He's built a lot of businesses. He has great customer relations, and he has a lot of great ideas. And we're not going to be standing still here. We're, again, hitting the ground running tomorrow with some of the things Andy's talked about and more as he gets deeper into the job. And I also -- one other thing I just want to say, I just want to recognize David Mendels. David was successful in building really the only $150 million revenue OVP company in the world. In the last 2 years, he's done a remarkable job at bringing us through a tremendous product cycle that puts us in a very good position today. And so thank you to David, and thank you to David for having Andy waiting in the wings. That was obviously very helpful and makes this transition quite smooth.

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Operator [16]

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The next question is from Lee Krowl of B. Riley.

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Lee Krowl, B. Riley & Co., LLC, Research Division - Associate Analyst [17]

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First question is just kind of on the third-party issues that you guys talked about with your implementation in Japan. Just out of curiosity, is that a product of the data center migrations? And is that something that we should expect the rest of the year?

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Andrew W. Feinberg, Brightcove Inc. - Acting CEO, President & COO [18]

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No. So if I'm understanding your question correctly, and thanks for it, the situation with our launch involved a third-party infrastructure partner who failed to perform at scale and -- actually 2. And so one of them, we have decided to exchange out. And we -- through our testing and in live production, we are confident that our new infrastructure partner will be able to handle peak demand. And, in fact, the customer is live and stable now and has been for several weeks, and we're very pleased with the performance.

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Lee Krowl, B. Riley & Co., LLC, Research Division - Associate Analyst [19]

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Got it. Also just on the cost front, and I know you guys are going to talk about it in more detail next quarter. But just noticed that headcount continues to grow, is that expected to continue? Or is headcount going to level off as part of these cost initiatives? And if so, where are you guys going to continue growing, whether it's on the R&D front? Or will we see some expense leverage at some point from the headcount?

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Andrew W. Feinberg, Brightcove Inc. - Acting CEO, President & COO [20]

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Yes. So one of the things that I'm doing in the first 90 days is looking at the entire organization, making sure that we understand where we have productivity, where we are getting returns on a number of the investments that we've made over the last number of quarters. And we'll be considering the existing plan with open headcount in combination with that review.

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Lee Krowl, B. Riley & Co., LLC, Research Division - Associate Analyst [21]

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Got it. And then I know you guys talked about the bookings growth kind of tracking to expectations. Without getting into detail, could you maybe just kind of talk about across the products, be it media, digital marketing and volume, where you're seeing that booking strength?

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Andrew W. Feinberg, Brightcove Inc. - Acting CEO, President & COO [22]

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Sure. So on a global basis, we've seen a lot of strength in media, in particular in Asia-Pac and Japan on the media side. We've seen really tremendous success, tremendous demand. In digital marketing, as you know we made our initial investments in North America and we have seen very strong return, especially on the new logo acquisition side, digital marketing North America, as well as in our retention numbers in digital marketing North America. As a result of the fantastic growth that we've seen on the media side in Japan and Asia-Pac, we have not taken limited resources and made the same investments on the digital marketing side in those regions. Instead, we've made the strategic choice to continue to resource pursuit of those media opportunities. Once we have further proof points that we're really getting superior velocity on a sustained basis on the digital marketing side in North America, we'll make choices about which of those investments to bring to the other regions.

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Lee Krowl, B. Riley & Co., LLC, Research Division - Associate Analyst [23]

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Okay. And then the last one from me is -- so you guys are targeting EBITDA profitability in Q4. Without guiding to 2018, does that seem sustainable? Or is it going to kind of fluctuate as you kind of reevaluate costs and investments in 2018?

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Andrew W. Feinberg, Brightcove Inc. - Acting CEO, President & COO [24]

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So I'm going to let Kevin address that first.

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Kevin Rhodes, Brightcove Inc. - CFO [25]

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Yes. When we think about getting to fourth quarter profitability, first of all, one of the things that we looked at here is that the mix of our revenue should continue to shift more towards subscription and we should see professional services come down especially as some of these larger OTT projects start to wane as we deliver and launch them. So we should see a shift mix, in which case margin is effectively higher-calorie margin on that revenue mix throughout the rest of the year. So that should certainly help us get to profitability. And then some of these costs that we're talking about for these infrastructure providers should actually start to tail off at the end of the year as well. And then, of course, what Andy talked about, with some of those operating expenses that we're going to look at and see if we can't curtail some of those in the fourth quarter as well without impairing our long-term growth. When we think about 2018 and beyond, we're not guiding that yet, but the goal is to develop a plan that is sustainable profitability for the company going forward.

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Operator [26]

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The next question is from Michael Latimore of Northland Capital Markets.

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Nick Altmann, [27]

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This is actually Nick Altmann on for Mike. The first one, I think you guys mentioned that overages were $500,000 above your forecast. But can you tell us what exactly overages were in the quarter? And then I guess going off of that, do you guys expect overages to grow year-over-year in 2017?

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Kevin Rhodes, Brightcove Inc. - CFO [28]

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Sure, Nick. Happy to talk to you about that. So first off, we should remember that overages are -- they vary quarter-to-quarter and they're not as predictable as our SaaS subscription revenue. There was no, in particular -- particular driver or customer in the quarter that drove those overages. They were $2.4 million in the quarter. We had mentioned last quarter, when we did $1.9 million that quarter, that we are effectively guiding the rest of the year based on a forecast of $1.9 million per quarter. That's not really changed for us. One quarter does not necessarily make a trend. And so we are continuing to put $1.9 million in our forecast for the rest of the year.

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Nick Altmann, [29]

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Got it. Okay, thank you. And then you guys mentioned updating the pricing packages are a top priority. Are all of your media customers on track to be on the new pricing plan by year-end?

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Andrew W. Feinberg, Brightcove Inc. - Acting CEO, President & COO [30]

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So -- thanks for the question. Yes, we've rolled out the new pricing. It's going quite well so far, but it is still the early stages and we still have 3 quarters left. But the early results are very encouraging. We think we've sized it correctly. We believe that the majority of the issues that we talked about in Q1 are going to be lapped within the time period that we discussed, meaning by the end of Q1 of '18. And we've had some real success in the field and it's really resonating with the customers. So we're very happy.

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Nick Altmann, [31]

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Okay, got it. And then just last one for me. How many of your top 10 customers now are on dynamic delivery?

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Kevin Rhodes, Brightcove Inc. - CFO [32]

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We are rolling customers on largest customers first and then rolling them throughout. I can't tell you exactly how many of our top 10 customers are on it. I will tell you that the engineering and the product organization has a plan to roll everybody into dynamic delivery throughout the rest of the year.

Nick, so I'm not going to give you exact number here today, but a number of them are.

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Nick Altmann, [33]

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Got it.

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Kevin Rhodes, Brightcove Inc. - CFO [34]

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And we've been very pleased with it.

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Operator [35]

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We have no further questions at this time. I'd like to turn the conference back over to Mr. Fienberg for closing remarks.

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Andrew W. Feinberg, Brightcove Inc. - Acting CEO, President & COO [36]

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So thanks, everybody, for joining the call today, and thanks for your questions. In summary, there were a lot of good things that happened this quarter and the company has a terrific opportunity in front of it. We had our situation with our large OTT customer. We made the right choice. It's a long term, very valuable contract and investing to ensure the customers' success was the right choice. We're very pleased about lot of the things that we've done this quarter. The opportunity in front of us is fantastic. We have the best products in the world and a fantastic team. And so I'm very privileged and honored to be taking on this role. And so thanks for your support.

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Operator [37]

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Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. And thank you for your participation.