Qumu Corporation (NASDAQ:QUMU) Q3 2022 Results Conference Call October 27, 2022 4:30 PM ET
Company Participants
Rose Bentley – President and CEO
Tom Krueger – CFO
Matt Glover – Gateway, IR
Conference Call Participants
Daniel Kapke – Craig Hallum Capital Group
Vivekanandhan Palani – JMN Investments Research
Operator
Welcome to Qumu’s Third Quarter 2022 Conference Call. My name is Curt Wright, I will be your operator this afternoon. Joining us on Qumu’s are Qumu’s President and CEO, Rose Bentley; CFO, Tom Krueger; and Matt Glover from Gateway Investor Relations. [Operator Instructions]
I would now like to turn the call over to Matt Glover. Sir, you may begin.
Matt Glover
Thanks, Curt, and good afternoon, everyone. After the market closed today, Qumu issued a press release announcing its financial results for the third quarter ended September 30, 2022, a copy of which is available in the Investor Relations section of the company’s website.
During today’s call, management will make certain statements with respect to the company’s expected financial results, the company’s go-to-market strategy and efforts designed to increase the company’s traction and penetration with customers. These statements are forward-looking and involve a number of risks and uncertainties that could cause actual results to differ materially. Please note, these forward-looking statements reflect management’s opinions only as of the date of this call, and the company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
Please refer to Qumu’s SEC filings, specifically its Form 10-K and 10-Q and financial results, press release, for a more detailed description of risk factors that may affect the company’s results. During the call today, management will discuss adjusted EBITDA and a non-GAAP financial measures. In the company’s press release and filings with the SEC, both of which are posted on the company’s website, you will find additional disclosures regarding this non-GAAP measure, including a reconciliation of this measure with its comparable GAAP measure. Non-GAAP financial measures are not intended to be considered in isolation from, a substitute for or superior to GAAP results. The company encourages you to consider all measures when analyzing its performance.
I would like to remind everyone that this call is being recorded and will be made available for replay via a link available in the Investor Relations section of Qumu’s website. Now I’d like to turn the call over to Qumu’s President and CEO, Rose Bentley. Rose?
Rose Bentley
Thank you, Matt, and good afternoon, everyone, and thank you for joining us today.
To start off, early in our third quarter, I completed the proverbial first 100 days as Qumu’s CEO. As the well-known saying goes, time flies when you’re having fun. I’m certainly enjoying collaborating with our team, driving meaningful business value for our partners and our customers alike. My first 100 days focused on continuing to execute on Qumu’s staff transformation strategy, delivering a best-in-class customer experience and delving down on our partner-led go-to-market motion. The strategic investments we made in our customers and our partner’s ecosystem over the last 18 months continued to yield strong returns.
Additionally, retention and renewals were especially strong during the quarter with renewals coming from UniCredit, Birmingham County Football Club and pediatric oncology center, PrinsesMáxima Centrum. From a financial standpoint, during Q3, we built on the momentum we established in the first half of 2022 and delivered solid growth across our key SaaS metrics, including SaaS revenue, SaaS recurring revenue and SaaS revenue as a percentage of our top line.
Most notably, we generated a 6% increase in SaaS revenue and a 7% increase in SaaS annually recurring revenue or ARR. As well as we expanded our SaaS revenue as a percentage of reoccurring revenue to 62%. And we were able to deliver these growth results, while dramatically reducing our OpEx and cash usage.
Overall, Qumu’s improving financial results and strong SaaS KPIs reflect the increasing success momentum of our partner-led sales strategy and our current customers growing their investment with Qumu as their trusted provider of live and asynchronous video content.
I’ll now turn the call over to Tom to provide more details on our Q3 financial performance and key SaaS metrics. Tom?
Tom Krueger
Thanks, Rose. It’s a pleasure to be speaking with you today.
Similar to last quarter, I will expand on a few metrics that Rose highlighted, which are also included in our earnings release that we published after the market closed. The metrics that we used to measure the success of our SaaS transformation continue to move in the right direction and reflect our team’s continued execution of our growth strategy. As we enter the final stages of our cloud transformation, we still believe these metrics most accurately reflect our performance and business going forward.
As Rose highlighted, SaaS revenue for Q3 2022 increased 6% to $2.8 million compared to $2.6 million in Q3 2021. SaaS ARR for Q3 increased 7% year-over-year to $13.5 million and 1% sequentially from $13.3 million in Q2 2022. SaaS revenue for Q3 2022 accounted for 63% of recurring revenue, up from 61% in the prior quarter and 52% in Q3 2021. We are on track for SaaS recurring revenue as a percentage of total recurring revenue to be approximately 65% by the end of this year, and approximately 75% by the end of 2023. As a percentage of total revenue, SaaS revenue accounted for 51% compared to 54% in Q2 2022, and 41% in Q3 2021. Our SaaS retention rates remained strong with a gross retention rate of 92% at quarter end, and our net retention rate was 100% at the end of Q3.
Now moving down the income statement. For the third quarter of 2022, our gross margin was 77.5%, up from 75.4% in Q2 and 76.0% in Q3 2021. The improvement in gross margin was due to better margins on SaaS revenue recognized compared to Q2 2022, a higher percentage of SaaS revenue contributing to the overall sales mix compared to Q3 2021 and improved utilization of professional services personnel. We expect to maintain gross margins in the mid-70s for the balance of 2022 and first half of 2023.
Moving on to operating expenses. As Rose alluded to, Qumu’s transformation, thus far, has not only been focused on our SaaS journey, but also on optimizing our cost structure and realizing efficiencies to achieve cash flow breakeven. We’re really encouraged by our success in these key areas and the fact that we’ve been able to drive down our OpEx over the last several quarters. Along that line, OpEx in the third quarter of 2022 was $6.2 million, down 12% sequentially and 30% year-over-year. We anticipate that our normalized OpEx run rate in the coming quarters will be approximately $6.5 million per quarter.
Proactive cost rationalization has been a consistent highlight during the first 9 months of 2022, enabling us to improve quarterly cash used in operations each quarter from $4.9 million in Q1, $3.7 million in Q2 and $1.4 million in Q3. While we’ve made great strides improving our cash used in operations, we will continually look for ways to further optimize our cost profile without sacrificing our ability to execute our growth road map.
Looking at our profitability measures, adjusted EBITDA, a non-GAAP measure, in Q3 2022, totaled a loss of $1.6 million, an improvement from a loss of $3.1 million in Q2 2022 and a loss of $3.5 million in Q3 2021. A reconciliation of adjusted EBITDA to net loss, a GAAP measure, is included in our earnings releases for the respective periods.
Net loss in Q3 2022 totaled $1.4 million or $0.08 loss per basic and diluted share. This compares to a net loss of $2.6 million or $0.15 loss per basic and diluted share for Q2 2022, and a net loss of $3.7 million or $0.21 loss per basic and diluted share in Q3 2021.
Shifting gears to the balance sheet. At quarter end, we had $6.0 million of cash and cash equivalents, including $1.2 million borrowed from our line of credit. We continue to tightly manage cash and seen through our reduction in cash usage over the course of 2022. We expect a continued reduction in net cash usage over the coming quarters as we realize further benefits from our cost reduction measures and our high-velocity, lower-cost, partner-led sales model.
That concludes my prepared remarks. I’ll turn it back over to Rose to discuss our strategy, key partnerships and our outlook. Rose?
Rose Bentley
Thanks, Tom.
Over the past several quarters, our theme as a company has been validation through execution. Our team’s consistent operational execution has validated our strategy and enabled us to enter the final phase of our SaaS transformation journey ahead of plan. Our channel partner strategy has been validated by the volume of opportunities we are seeing as well as the rate of which we are closing new business.
In fact, our new logo count for the first 9 months of the year exceeds all new logos we secured in 2021, and we continue to see over 80% of our new bookings being sourced by our partners. Partners such as British Telecom and VQ were key contributors to our new logo additions in Q3, which included a multinational security chemicals company and a global professional services firm. We also secured a win with a unit of the Department of Defense through our partnership with customer, which we believe will continue to lead to additional wins within the government sector.
In addition to the exciting customer wins that we have secured in the quarter, we continue to advance our partnership with AT&T. As I mentioned on our last call, we met with AT&T leadership in August to explore further opportunities to strengthen our relationships. I’m excited to report that we will be working together with AT&T to expand their go-to-market efforts with Qumu’s video engagement platform. This multifaceted program will provide AT&T with numerous value-add functions including product management, marketing communications, channel marketing, sales operations and professional services for the launch of its Qumu-powered enterprise video as a service offering.
We have already received preliminary acceptance for several elements within the program and expect to see resulting revenue and purchase orders as soon as next quarter. Additionally, we further evolved our SaaS enterprise by taking an obvious next step collaborating with Google to deliver our Qumu video engagement platform to Google Cloud Marketplace. By combining our industry-leading expertise with Google’s mass engagement, we expect customers to derive enhanced value from this partnership. We are in the early days of our partnership with Google, but we are encouraged by our ability to share customers and deliver targeted account mapping and build pipeline together for 2023.
An exciting trend that we have seen over the course of 2022 is an increasing trust in the Qumu brand providing strength and support for our growth initiatives. As we head into Q4, our pipeline for renewals and new customers is incredibly strong in building and being fueled by continued momentum in our partner-led strategy. Many of the renewals we completed in Q3 as well as Q4 renewals include an expansion of our customer relationship. Customers are increasingly — their internal usage of Qumu platform, resulting in a broader network of technology partners and new enterprise use cases for us to target going forward. A growing number of renewals secured in Q3 were for multiyear contracts, and we expect future renewals to follow suit.
In fact, for the first 9 months of 2022, 3-year contracts account for nearly 20% of our renewals. These long-term contracts reflect the confidence our customers have in our cloud-based solutions and unmatched level of customer service. During our recent quarterly business review with one of our clients they remarked, “You simply will not let us fail.” This statement is a powerful testament to the standard of care and quality of service that we hold ourselves accountable to here at Qumu.
Looking ahead at Q4, we expect to see meaningful contributions from our value partners, British Telecom and Collective. In December of last year, we announced our partnership with Collective along with the launch of the Qumu Partner Program. It is exciting to see the ongoing synergies blossom from this partnership. The right partners are accelerating Qumu’s entry into new markets strengthening our competitive positioning and teeing up repeat business.
The third quarter was key in building the trust that fuels our customer engagements. We successfully brought down our cash usage from operations, further stabilizing our runway as we complete the final stage of our cloud transformation and work toward cash flow breakeven.
Going forward, our plan for the rest of 2022 is to ensure that the last of our marquee customers are seamlessly transitioned to the Qumu Cloud platform and double down on our momentum from the partner-led strategy. We expect to continue to monetize our partner relationships and discover synergies that will ultimately be reflected in our bottom line results.
As I shared in my most recent CEO dispatch, our 3-year vision for Qumu is to achieve $50 million revenue as a profitable and predictable company by the end of 2025. The strategic investments we have made into the business over the past several years position us to now focus on scaling outwardly and promoting our platform through our network of partners and collaborators. The benefits of our transformation will become increasingly evident in growth in reoccurring revenues later this year and into 2023.
We will now take your questions. Curt, please provide the appropriate instructions.
Question-and-Answer Session
Operator
[Operator Instructions] And our first question will come from Jeff Van Rhee with Craig Hallum Capital Group.
Daniel Kapke
This is Daniel on for Jeff. Just a quick question on the pipeline. Just curious, as you’re talking about the opportunities with partnership, if you can give us any sense or how the pipeline has evolved in size and scope versus, say, 3, 6 months ago.
Rose Bentley
Yes, certainly. Happy to answer that. Thank you for the question. Yes, as we explore the pipeline, as we think about what we’re building around the enterprise, we continue to see enterprise brands wanting to explore and invest in video. So the expectation of the enterprise consuming that video and growing that pipeline, we are still continuing to see. When we reflect back over a year ago, we had grown our pipeline over 70%. And if you even look at even just the past 6 months, we’re continuing to see that pipeline evolve and set us up for success in Q4 and into 2023.
Daniel Kapke
And then just on the splits between revenues that are recurring versus — sorry. Excuse me. Got lost on my notes here, 1 second. Just on subscription versus broader growth, can you give us a sense on how we should be thinking about subscription growth moving forward, just sort of broadly?
Rose Bentley
Yes, certainly. So for us, subscription growth has been — if you look at just like the SaaS overall growth in subscription growth, it will be the #1 priority focus for us. So if you think of SaaS, we’ve been seeing it decline, but it’s because we’re going through the cloud transformation, and we’re converting those into subscription-based business. So I would expect the subscription based business to moderately grow as it has been. We don’t expect to see a decline in that growth. We expect to see that at least maintain, if not grow moderately through 2020 — to the end of the year and into 2023.
Operator
We have another question here, I’m just pulling it out the queue. Our next question comes from Palani, Vivekanandhan from JMN Investment Research Group.
Vivekanandhan Palani
I’m Vivek on behalf of Mike Latimore. I have about a couple of questions here. The first one is have you guys seen any sales elongation given microeconomic concerns?
Rose Bentley
I’ll take that one. So we are continuing to see digital transformation to be a priority for the enterprise. We are also continuing to see that the power of the incumbent is one of the reasons our redemption of renewal rates are so strong, it’s there. I think as we start to examine how enterprises will behave going forward, I think we are all watching and acknowledging the uncertainty in the current market and that 2023 needs to be derisked due to some of the stabilization in the demand. But at this point today, we are not seeing this slow, but we expect, as I said, to start being very smart and acknowledge, I think, some of the uncertainty in the market as we start to reflect into 2023 and our planning.
Vivekanandhan Palani
Great. My second question is what have been the biggest use cases in demand?
Rose Bentley
Oh, yes. So by far, right, it’s short-form video, so asynchronous content or consumption of video. Across our customer base, 100% of our customers consume video asynchronously. And there’s a lot more user-generated content because of that, right, because they’re consuming and creating content on their own. We continue to see, of course, a decent size of our customers leverage live events and live communication. But that’s becoming less and less because I think people are understanding that the blended workday is changing and that people expect to consume content when they want to consume it and especially when you’re trying to manage a lot of the global audiences.
Vivekanandhan Palani
Great. I have one last question with me. And can you give — hello, am I audible?
Rose Bentley
Yes, you are. I can hear you.
Vivekanandhan Palani
Yes. The last question is did you see any customers churn off on your on-premise software to third-party SaaS providers?
Rose Bentley
Did we see any on-premise churn? Is that the question?
Vivekanandhan Palani
Yes, on premise software services. For on-premise software services.
Rose Bentley
Yes. So coming into the year, we continue to forecast a decline in that maintenance revenue and in that on-prem revenue. So the short answer is yes. We do see customers on the on-prem business choose to either stay on-premise, not embrace the digital transformation and move to the cloud or continue to potentially choose or go with another vendor. That is something that we continue to see as we transform to the cloud.
Operator
Thank you so much for your questions. At this time, we’ll conclude the Company’s question-and-answer session. If you have a question that’s not taken, please contact Qumu’s IR team at QUMU@gatewayir.com. Now I’d like to turn the call back over to Ms. Bentley for her closing remarks.
Rose Bentley
Thanks, Curt, and thank you, everyone, for joining our call this afternoon. If you haven’t done so already, I encourage you to follow Qumu on Twitter or LinkedIn to automatically receive my ongoing CEO dispatches for better color on up-to-date initiatives underway here at Qumu. Back over to you, Curt.
Operator
Thank you for joining us today. This will end the conference and the — Qumu’s Third Quarter Conference Call. You may now disconnect.
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