Brightcove’s “Disappointing” Quarter

On Thursday (2/21), Brightcove (BCOV) reported somewhat disappointing 2019 fourth quarter performance and guidance which caused its stock to plummet 12.8% on the open and end the day down 7.2% (from the previous close). Yet, buyers emerged quickly after the stock got slammed at the open.  The stock closed up 6.5% on the day from the opening low.

Revenues for the quarter were $47.6 million, up 16.5% vs. the prior year (due mostly to the acquisition of Ooyala), but at the low end of management’s guidance and 0.5% below consensus estimates. More importantly, subscription and support revenue, which is the focus of management’s efforts to turn around the company, came in at $44.6 million, below management’s guidance of $45.3 million.

On the conference call, CEO Jeff Ray said that the company experienced a challenging sales quarter. He attributed essentially all of the subscription revenue shortfall to the disruption caused by the final stages of the “aggressive reorganization of [BCOV’s] go-to-market team.” Although that reorganization is now complete, Mr. Ray said that challenging sales performance in the 2019 second half would impact the company’s 2020 revenue growth outlook. Accordingly, management set 2020 first quarter revenue guidance at $46.8 million to $47.8 million, about a half million below analyst expectations, and full year revenue guidance $192 and $196 million, below the $200 million plus in revenues anticipated by Wall Street.

Brightcove ended the quarter with 3,595 customers down 3.4% sequentially and 5.0% for the year.  Most of the decline was in volume customers, which is consistent with management’s strategy and in line with the rate of declines in previous quarters.  However, the number of premium customers also declined sequentially by 1.0%, which is a concern.

Likewise, Brightcove’s recurring dollar retention rate, a measure of anticipated revenues from customer contract renewals, was 89%, below its goal of the low to mid-90s.  This was unchanged sequentially but down from 94% at the end of 2018.  

From a profit perspective, Brightcove reported 2019 fourth quarter adjusted EPS of $0.06 per share, which was at the high end of its $0.04 to $0.06 guidance range. Still, the company booked stock-based compensation expense of $4.8 million and merger expense of $3.4 million in the quarter, both above its previous guidance of $1.7 million and $3.0 million, respectively. Both of these line items are excluded from GAAP earnings in the company’s definition of (non-GAAP) adjusted earnings. By my estimates, the company’s reported 2019 GAAP loss per share of $0.17 was wider than the $0.08 per share loss implicit in its guidance.

With similar line item adjustments, Brightcove’s adjusted EBITDA, according to its own definition, was $3.5 million in the quarter, within its guidance range of $3.4 to $3.9 million, and better than the prior year’s $1.4 million.

As for earnings guidance, Brightcove anticipates 2020 first quarter adjusted EPS of $0.03 to $0.05 per share, better than analyst views, and 2020 full year adjusted EPS of $0.19 to $0.29 per share, which is consistent with Street expectations.

Included in that guidance is the expectation that merger expenses will be $5.5 million in the 2020 first quarter, but only $6.0 million for the year. As noted in the comments to my previous BCOV article, merger expenses have been running high – they totaled $11.4 million in 2019 – more than twice the cost of the Ooyala acquisition. To my knowledge, management has not discussed the reasons why these expenses have been so high, but they hopefully will provide some explanation in the MD&A section of the company’s 2019 10-K when it is released. The 2020 first quarter guidance of $5.5 million is nearly twice as high as the average 2019 quarterly run rate. However, management’s guidance anticipates only $0.5 million in merger expenses for the balance of the year.

Similarly, capitalized software costs rose again to about $1.9 million in the 2019 fourth quarter, up from less than $1.8 million in the third quarter. For the full year, they came in at $6.2 million, more than double 2018’s $3.0 million. Management’s disclosures suggest that amortization of software costs also rose; but the exact amount of net capitalized software costs was unclear.  This is another disclosure that should be included in the company’s 2019 10-K.

On balance, while there were some disappointing aspects to Brightcove’s fourth quarter earnings report, the results were largely within management’s guidance. Ditto for its 2020 guidance. The main concern that was reflected in the decline in the share price was the disappointing subscription and support revenues, which was acknowledged by management and incorporated into its 2020 revenue guidance. Yet, management says that the extensive changes made to its sales effort are now complete and that distraction should not be a factor in its 2020 performance.

On the call, management touted its new product rollouts, especially Brightcove Beacon, its “over-the-top” offering that it says is positioned to be one of the most successful product launches in the company’s history. Management also spoke enthusiastically about Brightcove Campaign, its demand-generation marketing application that was introduced during the fourth quarter.  One key question is whether these products can generate sufficient sales to make a meaningful impact in the company’s overall financial performance.

Management’s 2020 guidance anticipates roughly a 5% improvement in revenues and by my estimates, a 400 basis point improvement in operating margin (excluding the anticipated decline in merger costs).  At the current share price, the stock is trading at roughly 30 times management’s adjusted EPS guidance.  Consequently, in my opinion, the company’s outlook for 2021 will have to anticipate further improvement to support the current valuation (or any increase in the share price).

Fourth quarter results raised some new questions and added somewhat to the uncertainty.  Yet, Brightcove remains a work in progress that can still achieve improved sales and profits in 2020. With the revamping of Brightcove’s organization now complete, investors will learn whether Mr. Ray and his team can deliver meaningfully improved operating and financial performance in 2020 and beyond.

February 24, 2020

Stephen P. Percoco
Lark Research
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