KLTR - Brightcove Cuts Operating Losses But Revenue Growth Remains A Question

2023-11-03 15:15:48 ET

Summary

• Brightcove Inc. Q3 2023 financial results show a 5.4% decrease in total revenue year-over-year.
• The company provides video publishing software and services globally but is struggling to achieve revenue growth.
• The global market for enterprise video applications is expected to reach $31.4 billion by 2027.
• Until management can reignite revenue growth while reducing operating losses, my outlook on Brightcove Inc. remains a Sell.

A Quick Take On Brightcove

Brightcove Inc. ( BCOV ) reported its Q3 2023 financial results on November 1, 2023, with total revenue falling 5.4% year-over-year.

The firm provides various video publishing software and related services for video production and distribution by organizations worldwide.

I previously wrote about BCOV with a Sell outlook.

The firm is cutting costs and reducing operating losses, but revenue growth remains elusive.

Until management can reignite revenue growth while reducing operating losses, a tough task, my outlook remains to Sell BCOV.

Brightcove Overview And Market

Massachusetts-based Brightcove provides organizations with a video production and distribution platform via a suite of subscription software products.

The firm is led by CEO Marc DeBevoise, who was previously Chief Digital Officer at ViacomCBS and CEO of CBS Interactive.

The company’s primary offerings include:

• Marketing studio

• Communications studio

• Media studio

• Audience insights

• Zencoder

• Global services

• Marketplace.

BCOV acquires new customers through its direct sales, marketing and business development efforts and partner referrals and channels.

According to a recent market research report by MarketsAndMarkets, the global market for enterprise video applications was estimated at $19.8 billion in 2022 and is expected to reach $31.4 billion by 2027.

This represents a forecast CAGR of 9.7% from 2022 to 2027.

Organizations are adopting video due to its low cost, user-friendliness and ability to build a personal connection between users. However, the same technological advances that have made video so accessible are also rendering it more vulnerable to abuse.

The primary reasons for this forecasted growth are increased demand for video streaming and communicating across distributed workforces.

North America was estimated to have the largest market share in 2020 and is forecast to remain the largest market size of the major global regions.

Major competitive or other industry participants across all of the platform's functionalities include:

• Microsoft (MSFT)

• Amazon (AMZN)

• Twilio (TWLO)

• Cisco (CSCO)

• Zoom Communications (ZM)

• Adobe (ADBE)

• Intrado

• Synamedia

• MediaKind

• Comcast Technology Solutions

• Kaltura

Brightcove’s Recent Financial Trends

Total revenue by quarter was flat sequentially and down year-over-year as the company faced headwinds from reduced overages and a challenging macro environment. Operating loss by quarter has made some progress toward breakeven in recent quarters due to management’s continued focus on cutting costs:

Gross profit margin by quarter (green line) has trended lower in recent quarters due to higher depreciation & amortization from 2022 project launches; Selling and G&A expenses as a percentage of total revenue by quarter (amber line) have been volatile more recently as the company has undertaken a 10% headcount reduction:

Earnings per share (Diluted) have made some progress toward breakeven but have a significant distance still to go:

(All data in the above charts is GAAP.)

In the past 12 months, BCOV’s stock price has fallen 57.43% vs. that of Kaltura, Inc.’s ( KLTR ) drop of only 6.81%. The divergence began with Brightcove’s Q4 2022 earnings announcement in late February:

For balance sheet results, the firm ended the quarter with $16.4 million in cash and equivalents and no debt.

Over the trailing twelve months, free cash flow was $1.1 million, during which capital expenditures were $4.9 million. The company paid $14.0 million in stock-based compensation in the last four quarters, the highest trailing twelve-month figure in the past eleven quarters.

Valuation And Other Metrics For Brightcove

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha.)

As a reference, a relevant partial public comparable would be Kaltura:

(Source - Seeking Alpha.)

BCOV’s most recent unadjusted Rule of 40 calculation was negative (8.7%) as of Q3 2023’s results, so the firm’s results have worsened slightly compared to Q1 2023, per the table below:

(Source - Seeking Alpha.)

Sentiment Analysis

The chart below shows the frequency of various keywords during management’s most recent conference call with analysts:

Analysts asked leadership about the decline in add-on revenue, large-deal pipeline activity and gross margin decline.

Management said that it doesn’t have visibility into when the add-on revenue decline laps previous results but expects new business growth (ex-overages) to continue in the quarters ahead.

The firm is continuing to have a meaningful large-deal pipeline, but those are characterized by longer sales cycles, which will likely push into 2024.

The gross margin decline was driven by incremental depreciation and amortization from new products launched in 2022.

Commentary On Brightcove

In its last earnings call (Source - Seeking Alpha ), covering Q3 2023’s results, management’s prepared remarks highlighted the growth of its revenue backlog, which increased by 21% year-over-year.

The company generated 40% of its revenue from international sources, with Japan and Asia Pacific accounting for 24% and Europe for 16%.

Management is also focused on "identifying ways to improve" the company's cost structure while investing in growth areas.

The firm is seeing additional declines in overages compared to 2022; it is responding by seeking to sign customers to multi-year contracts, which serve to deliver greater predictability to the company and to its customers.

Total revenue for Q3 2023 fell by 5.4% year-over-year, and gross profit margin also slid by 0.7%.

The firm’s net revenue retention rate was 93%, the same year-over-year, and "continues to reflect the impact from the lower add-on sales performance in the year."

Selling and G&A expenses as a percentage of revenue fell by 0.3% YoY, while operating losses worsened to ($2.2 million) for the quarter.

The company's financial position is reasonably good, with some liquidity, no debt and a small amount of positive free cash flow.

BCOV’s Rule of 40 performance has been poor and worsening due to a combination of negative revenue growth and increasing operating losses.

Looking ahead, forward consensus revenue expectations are for a topline revenue decline of 4.6% for the full year 2023 period.

If achieved, this would represent a higher revenue decline versus 2022’s decline rate of 0.1% versus 2021.

In the past twelve months, the firm's EV/Sales valuation multiple has dropped by over 48%, as the chart from Seeking Alpha shows below:

A potential upside catalyst to the stock could include landing a large deal or two, but that will likely not occur until at least 2024.

While the company's cost reductions are starting to reduce its operating losses sequentially, revenue growth remains elusive.

Until management can reignite revenue growth while reducing operating losses, a tough task, my outlook remains to Sell BCOV.

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