Brightcove 2015 Third Quarter Update

The company reported a third quarter GAAP loss of $0.04 per share, much better than last year’s $0.12 loss. Adjusted (non-GAAP) EPS, which excludes (non-cash) stock-based compensation and merger-related costs was positive at $0.03, a reversal of last year’s $0.03 loss. I was anticipating a GAAP loss of $0.08 and a non-GAAP loss of $0.02, so the company’s performance exceeded my expectations (and also the Street’s, since my earnings projection was in line with the consensus estimate).

Third quarter revenues of $33.8 million were up 7% year-over-year and modestly above my expectations of $33.2 million. Consensus estimates anticipated revenues of only $31.4 million.

This was quite a turnaround. We knew going into the quarter that the company would gain $0.5 million in revenues from deals that had been delayed in the previous quarter. Even so, Brightcove was able to lift the growth rate of its revenues, despite the headwind from unfavorable foreign currency translation and the final lingering effect of the loss of a major customer last year. Although the number of premium customers increased only slightly from 1,847 in both the 2014 third quarter and the 2015 second quarter to 1,852 in the 2015 third quarter, I estimate that the recurring dollar retention rate (i.e. the percentage of the dollar value of renewing contracts to the total up for renewal) jumped from 89% in the 2015 second quarter to 99% in the third quarter. After last quarter’s disappointing results, it appears that Brightcove’s salesforce pulled out all stops to revive sales momentum.

Equally as impressive was the improvement in profitability. The company’s gross profit margin improved only slightly, by 30 basis points to 66%; but operating expenses as a percent of revenues declined by 650 basis points, as each key line item—R&D, sales & marketing and general and administrative (G&A) expenses, declined as a percent of revenues. Merger-related expenses declined significantly, as expected, but the decline in G&A costs was very much a surprise (due mostly, it seems, to a drop in the amount of stock-based compensation allocated to G&A expense). The company also benefited from a drop in other expenses that came from a non-repeat of last year’s foreign currency loss of $0.5 million.

Management was pleased with the results. It noted that the company returned to non-GAAP profitability one quarter earlier than expected. It also said that the improved revenue performance has helped to confirm that its expanded product portfolio and determined sales efforts are beginning to resonate with customers.

Investors also liked what they saw. After the company reported earnings on October 29, the stock vaulted 15% to close at $6.20 on October 30. It has since extended those gains, closing out this week at $6.45, up another 4%.

Although the latest earnings report was a marked improvement over the previous one, it is still too early to say that Brightcove is headed toward sustained double-digit revenue gains and profitability. In its favor, the company will not face the headwinds from the loss of its major customer, Rovio, from the fourth quarter onwards. Revenue comparisons should therefore be easier; but this is still a competitive business and content providers will undoubtedly continue to face revenue pressures from distributors. At the same time, the sharp improvement in Brightcove’s third quarter profitability was due in part to one-offs. Management has suggested that it expects the company to remain profitable (on a non-GAAP basis), but it is not clear whether Brightcove will be able to deliver steady improvement in profitability.

Still, management is upbeat and perhaps with further improvement in global economic conditions, Brightcove will be able to build that momentum for which investors have been waiting for more than two years now.   It is also important to remember that with the rapid growth in over-the-top (OTT) video, the addition of even one major customer can have a big impact on Brightcove’s earnings prospects.  Nevertheless, my previously revised price target on the stock remains at $10, which I hope will be achieved in one or two years time.

November 9, 2015

Stephen P. Percoco
Lark Research, Inc.
P.O. Box 1543
Linden, NJ  07036
(908) 448-2246

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