A key change at Brightcove since my last post has been the turnover at the top. In August 2017, after three consecutive quarters of earnings misses, Dave Mendels, who had served as CEO for more than four years, agreed with the Board to step down. Andrew Feinberg, Brightcove’s COO, stepped in as interim CEO.
In April 2018, Brightcove appointed Hugh Jefferson (Jeff) Ray III as its CEO. Mr. Ray had served successfully in leadership roles at several technology companies, including Ellucian, Ventyx, DS Solidworks, Progress Software and Compuware. Brightcove Chairman Gary Haroian said that Mr. Ray “has demonstrated an ability to enhance go-to-market strategies, scale enterprises and expand business opportunities at global technology companies.” His “deep operational and enterprise sales experience will be instrumental in positioning Brightcove for improved market share and long-term profitable growth.”
Brightcove’s Business. Brightcove is a leading global provider of cloud-based video services. Its flagship product, Brightcove Video Cloud, is the world’s leading online video platform. Video Cloud enables customers to publish and distribute high quality video to all types of internet-connected devices quickly, easily and cost-effectively. It also assists customers in monetizing video offerings and analyzing their performance.
While Video Cloud has historically accounted for substantially all of the company’s revenue, Brightcove has a suite of complementary cloud-based products, These include Brightcove Zencoder, a video encoding service; Brightcove SSAI, an ad insertion and video stitching service; Brightcove Player, which creates and manages web-based video players; Brightcove Video Marketing Suite, a set of video services designed to assist marketers in driving awareness, engagement and conversion among customers accessing video content; and Brightcove Enterprise Video Suite, for internal communications (including live streaming of employee meetings) and employee training.
Brightcove’s newest offerings include Brightcove OTT Flow, powered by Accedo, and Brightcove Beacon, both targeting the explosive growth in the “over-the-top” (OTT) market. These services allow OTT video publishers to deliver their content across a full range of devices (mobile, connected television and Smart TVs). They simplify workflows across multiple platforms. Through its subscriber management partners, Brightcove provides customers with an easy path to OTT video monetization with services such as registration, authentication, tracking capabilities and alternative pay formats such as ad-supported, subscription, freemium (i.e. combinations of free and premium services) and pay-per-view.
With its broad product portfolio and by virtue of its longevity, Brightcove has established a leadership position in cloud-based video services. Its April 2019 acquisition of the OVP assets of Ooyala for $11.5 million ($8.9 million of stock and $2.6 million of cash) affirmed Brightcove’s leadership. Ooyala was once viewed as Brightcove’s primary competitor.
Industry analysts – such as Frost & Sullivan, Forrester and Gartner – have recognized Brightcove’s market leadership. In 2016, Brightcove was named a leader in The Forrester Wave for its sales and marketing of its Online Video Platform (OVP). Frost & Sullivan named Brightcove its 2018 Global Company of the Year for capturing a 24% share of the “extremely fragmented” OVP market. It said that Brightcove’s “robust platform offering, ability to innovate based on customer needs, brand equity and geographic scale” have helped it become the market leader, in spite of heightened competitive pressures. In November 2018, Gartner named Brightcove as a Magic Quadrant leader in Enterprise Video Content Management for the second time. (In 2018, it shared the space with competitors MediaPlatform, Kaltura, Kumu and Panopto).
Brightcove’s products are modular and scalable to meet the needs of a wide range of video content publishers. Its customer base consists primarily of content publishers who seek a single, integrated solution for their video content publishing and distribution needs. Many of its customers are either new to video or still climbing the learning curve. (In recent years, Brightcove has concentrated much of its research and development spending on improving the functionality and scalability of its offerings, as well as their ease of use.) Often, its more experienced customers’ use of video has not gained sufficient scale to justify the cost, time and resources required to bring video software development and maintenance in house. Very large-scale users who maintain their own video software might still utilize certain Brightcove products, such as Zencoder or SSAI, to meet specific needs.
Jeff Ray’s Game Plan. Since becoming CEO, Mr. Ray has launched several actions designed to grow Brightcove’s revenues and profits:
A major initiative is to improve salesforce execution. In December 2018, Brightcove appointed Rick Hanson, formerly SVP and GM of North America for CA Technologies, to the newly created position of Chief Revenue Officer. Mr. Hanson is now responsible Brightcove’s entire sales organization including direct sales, channel sales and sales made through professional service organizations. Early this fall, the company announced new leaders for its sales teams in North America and Japan. It has made a special effort to bring in new talent and beefed up its salesforce training and development. Every rep is now certified to ensure delivery of a consistent message everywhere that Brightcove does business. The sales effort has also been split into separate groups focusing on new business and customer retention.
Brightcove is also focusing its new business development efforts on faster growing niche markets. Under the leadership of Charles Chu, who was appointed Chief Product Officer in July 2018, Brightcove has developed a strategy to target four (of nine) faster-growing niche markets, including OTT, regional broadcasters, corporate communications and marketing and demand generation. Sarah Larsen, who became Brightcove’s Chief Marketing Officer in September 2018, will lead the company’s unified marketing and demand generation strategies (designed to help customers convert potential leads identified through video into sales). Brightcove is also making investments to explore new market opportunities. It sees growth opportunities, for example, in market subsegments, such as live streaming to social media (e.g. Facebook and YouTube).
Finally, Brightcove is seeking to raise the profile of its brand and its thought leadership to increase its visibility with both existing and potential customers. That effort is also being led by Ms. Larsen. The company recently launched the Brightcove Video Index, which offers data-driven insights into video streaming trends.
Early Positive Results, But Still a Work in Process. These initiatives began to show early signs of success in Brightcove’s early in 2019. In 19Q1 and 19Q2, the company reported revenues and earnings that exceeded consensus estimates. It also reported a 5.5% sequential increase in premium customers, due to the acquisition of Ooyala.
(Brightcove categorizes its video customers as either premium or volume. Premium customers are typically larger enterprises that have higher usage and more sophisticated needs. Volume customers are mostly small and medium-sized businesses that typically have lower usage and do not require advanced features or functionality. For Brightcove, volume customers have been steadily declining for years; while premium customers have been mostly flat, until recently.)
Brightcove’s stock has been mostly in an uptrend over the past couple of years, but with considerable volatility. The stock rallied sharply in April 2018 after Mr. Ray was appointed CEO; but it was not able to hold on to those gains presumably because of the realization that Brightcove’s transformation would take time. The decline in the stock during the second half of 2018 also mirrored the sell-off in the broader market.
Brightcove’s stock bottomed with the rest of the market at the end of 2018 and then rallied in 2019 to an intraday high of $12.88 on August 19, fueled by the general market rebound and the positive first and second quarter earnings reports. It has since fallen steadily and sharply, however, as management tempered expectations for 19Q3 and 19Q4.
In its 2019 third quarter earnings report, Brightcove said that the accelerated pace of change following the acquisitions of Ooyala and another smaller “tuck-in acquisition” combined with its efforts to restructure the salesforce were disrupting operations temporarily. As a result, the company would likely see some slippage in its revenue growth and retention rate in 19Q3 and 19Q4. Nevertheless, management remains confident about its medium- to long-term outlook and expects that the company will begin to deliver improved financial performance in 2020.
Sizing Up the Upside Potential. Just how much revenue growth and margin improvement the company can achieve remains unclear. Management has not yet given specific guidance about its longer-term outlook.
Part of Mr. Ray’s compensation package includes performance incentives that result in accelerated vesting of restricted stock if the company achieves certain financial targets. For example, 50% of his awarded restricted stock units (RSUs) will vest if the company achieves the “Rule of 30,” a combination of revenue growth (organic and acquisitions) and adjusted EBITDA margin that equals at least 30 for any future rolling 12 month period (calculated at the end of each quarter). So, for example, a combination of 15% revenue growth and 15% adjusted EBITDA margin would meet this requirement. Alternatively, Mr. Ray would get accelerated vesting on 25% of his awarded RSUs if the combination of revenue growth and adjusted EBITDA margin equals at least 20 during a measurement period. RSU awards for other members of Brightcove’s management team are also reportedly subject to this formula.
Achieving a combination of even 20 would represent a significant improvement in Brightcove’s financial performance, as shown in the table below:
Historical and Projected Financial Performance with Key Non-GAAP Metrics: 2014-2021F
Included in the table above are projections for Brightcove for 2019 to 2021. These projections are not based upon an assessment of the potential growth of the company’s base business and its four targeted growth segments or its ability to improve profit margins. Rather, they are based upon my view of what seems reasonable based upon its historical record, if Brightcove is able to move to sustainable growth in revenues and profitability. The 2019 projections are consistent with management’s guidance. The 2020 and 2021 projections are my own. Management will presumably offer its guidance for 2020 when it reports 19Q4 earnings in February.
Valuation. At the current price of about $9, Brightcove has an equity market capitalization of $328 million and is valued at more than 100 times anticipated 2019 adjusted EPS of $0.08. With no debt outstanding and ignoring its Sept. 30 cash balance of $22.6 million and operating lease liability of $16.4 million, its enterprise value is also $328 million and its enterprise value-to-adjusted EBITDA multiple, based upon anticipated 2019 adjusted EBITDA of $8.8 million is 37 times. Obviously, Brightcove’s stock already anticipates a meaningful improvement in profitability.
Conclusion. Clearly, video is not new to the internet. There are some segments of the market that have matured, which has made the business increasingly competitive. Yet, as network capacity, especially in wireless, has steadily expanded, the use of video continues to grow rapidly. Video continues to gain share against text and audio, the two other primary modes of communications. New markets, such as OTT, are also accelerating video’s market share gains. This “rising tide” should give Brightcove more opportunities to find growth, which raises the odds that Mr. Ray and his management team can be successful in lifting the company’s overall rate of growth.
While it is difficult to say whether my projections are achievable (or possibly, whether they are too conservative), it is a pretty fair bet, I believe, that Brightcove will be able to achieve some meaningful improvement over its historical performance over the next year or two. Mr. Ray has adopted a thorough and methodical approach that addresses all aspects of the company’s go-to-market strategy. He has brought in new executives who have considerable experience in sales, marketing and product development. His team is now addressing all aspects of Brightcove’s operations, first by improving the effectiveness of the company’s sales effort (for new business and customer retention) and then by moving aggressively to exploit growth opportunities, including the near-term potential from targeting four faster-growing market segments and the longer-term potential by making modest investments to find new avenues for growth. Investors should be able to see Brightcove’s progress and make a better assessment of its growth potential by the second half of 2020. If the aggressive growth targets laid out by Brightcove’s Board of Directors prove to be unachievable, the company could conceivably become an acquisition target for potential acquirers, such as IBM, Oracle or even Akamai.
November 29, 2019
Stephen P. Percoco
839 Dewitt Street
Linden, New Jersey 07036
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