KLTR - Brightcove's Operating Losses Worsen As Revenue Drops

2023-06-12 18:31:18 ET

Summary

• Brightcove Inc. reported its Q1 2023 financial results on May 3, 2023.
• The company provides organizations with video production and distribution services via its SaaS platform.
• Brightcove is expecting a decline in 2023 revenue and has announced a 10% headcount reduction to stem the growing operating losses.
• Given a slowing macroeconomic environment and the firm's poor revenue and customer retention results, my outlook on Brightcove Inc. stock is a Sell.

A Quick Take On Brightcove

Brightcove Inc. ( BCOV ) reported its Q1 2023 financial results on May 3, 2023, missing revenue and EPS consensus estimates.

The company provides a range of video publishing software and related services for video production and distribution.

Due to the firm’s revenue contraction and belated response to increasing operating losses, my outlook on Brightcove Inc. stock is a Sell.

Brightcove Overview

Boston, Massachusetts-based Brightcove Inc. was founded in 2004 and provides organizations with a video production and distribution platform via a suite of subscription software products.

The firm is headed by Chief Executive Officer 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.

The firm acquires customers through its direct sales, marketing and business development efforts as well as through partner referrals and channels.

Brightcove’s Market & Competition

According to a recent market research report by MarketsAndMarkets, the global market for enterprise video applications was estimated at $16.4 billion in 2020 and is expected to reach $25.6 billion by 2025.

Video is increasingly being adopted as a communication tool by organizations 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.

This represents a forecast CAGR of 9.3% from 2020 to 2025.

The main drivers for this expected growth are a growing 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

• Amazon

• Twilio

• Cisco

• Zoom Communications

• Adobe

• Intrado

• Synamedia

• MediaKind

• Comcast Technology Solutions

• Kaltura.

BCOV’s Recent Financial Trends

• Total revenue by quarter has fallen in recent quarters; Operating income by quarter has deteriorated further into negative territory:

• Gross profit margin by quarter has also dropped more recently; Selling, G&A expenses as a percentage of total revenue by quarter have risen markedly in recent periods:

• Earnings per share (Diluted) have also fallen sharply into negative territory:

(All data in the above charts is GAAP.)

In the past 12 months, BCOV’s stock price has fallen 32.51% vs. that of Kaltura, Inc.’s ( KLTR ) rise of 5.62%, as the chart indicates below:

For the balance sheet , the firm ended the quarter with $12.5 million in cash and equivalents and no debt.

Over the trailing twelve months, free cash flow was only $3.7 million, during which capital expenditures were $9.8 million. The company paid $13.6 million in stock-based compensation in the last four quarters, the highest rolling twelve-month figure in the past three years.

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; shown below is a comparison of their primary valuation metrics:

(Source - Seeking Alpha.)

The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.

BCOV’s most recent Rule of 40 calculation was negative (5.6%) as of Q1 2023’s results, so the firm has performed poorly in this regard, per the table below:

(Source - Seeking Alpha.)

Commentary On Brightcove

In its last earnings call ( Source - Seeking Alpha ), covering Q1 2023’s results, management highlighted the reason for lower-than-expected adjusted EBITDA as due to a combination of lower-than-expected employee attrition and greater success hiring for key roles.

Management is seeing longer sales cycles and ‘a recent and meaningful drop-off in demand for add-on entitlements with existing customers.’

The result is less client overage usage, reducing revenue growth for the near future.

The company’s net revenue retention rate was only 94%, indicating sub-par renewal rates and poor sales & marketing efficiency.

Total revenue for Q1 2023 fell 8.1% year-over-year and gross profit margin dropped 5.8 percentage points.

Selling, G&A expenses as a percentage of revenue rose a whopping ten percentage points, indicating sharply lower efficiency in generating revenue and operating losses increased from $1.4 million in Q1 2022 to $10.2 million in Q1 2023.

Looking ahead, management is reducing its overall expenditures by $13 million on an annual basis, mostly by virtue of a 10% headcount reduction.

Full-year 2023 top line revenue guidance is $206.5 million at the midpoint, or a decline of 2.1% versus 2022’s results.

However, management reiterated that it expects to generate adjusted EBITDA of $17.5 million in 2023.

The company's financial position is acceptable, with some liquidity, no debt and positive free cash flow generation.

BCOV’s Rule of 40 performance has been poor in recent reporting periods.

From management’s most recent earnings call, I prepared a chart showing the frequency of key terms mentioned (or not) in the call, as shown below:

I’m most interested in the frequency of potentially negative terms, so management or analyst questions cited "Uncertain" two times, "Challeng[es][ing]" eight times, "Macro" two times and "Drop" once.

The negative terms refer to the challenges the firm is facing on the revenue front as it sees macro uncertainties pushing clients to delay or reduce spending.

Regarding valuation, the market is valuing Brightcove Inc. at a discount to comparable firm Kaltura and to the SaaS software industry as a whole, which isn’t surprising given its poor revenue and operating performance.

While management continues to insist the company's problems are temporary, I question how long ‘temporary’ will last given the likelihood of a worsening macroeconomic environment ahead.

A potential upside catalyst to the stock could include a pause in the rise of the cost of capital, thereby reducing downward valuation pressure on the stock, but such a catalyst is unlikely to last long.

Due to the firm’s revenue contraction and belated response to increasing operating losses, my outlook on Brightcove Inc. is a Sell.

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