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spk04: Welcome to Kumu's second quarter 2021 conference call. My name is Nika and I will be your operator this afternoon. Joining us is Kumu's President and CEO, TJ Kennedy, CFO Dave Bristow, and Matt Glover from Gateway Investor Relations. The results we will review today further enhance our pre-announcement shared on June 29, 2021. At this time, all participant lines are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to turn the call over to Matt Glover. Sir, you may begin.
spk00: Thanks, Operator, and good afternoon, everyone. After the market closed today, Kumu issued a press release announcing its financial results for the second quarter ended June 30th, 2021, 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 impact of COVID-19 on the use and adoption of video in the enterprise, 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 that 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 a result of new information, future events, or otherwise, except as required by law. Please refer to CUMU's SEC filings, specifically its Form 10-K 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, a non-GAAP financial measure. 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 the 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, 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 will be recorded and made available for replay via a link available in the investor relations section of Kumu's website. Now I would like to turn the call over to Kumu's President and CEO, T.J. Kennedy. T.J.? ?
spk03: Thank you, Matt, and good afternoon, everyone. It's a pleasure to be speaking with you today. It has been just over a year since I joined as CEO, and a lot has happened in that time. Most importantly, we have made significant progress through the early stages of our company's ongoing transformation into a SaaS-first organization that is capable of generating robust and predictable long-term growth. Execution on our strategic roadmap has undoubtedly strengthened Kumu's position as a leader in cloud-first enterprise video, and jumpstarted our evolution towards becoming a subscription-first business. The work has not been without its challenges, and we still have much to do in order to realize our vision. As we shared in our second quarter preliminary results conference call on June 29th, our financial results were lower than expected, driven by longer-than-anticipated transitions and ramp-up periods with our organization, which has impacted our ability to achieve our overall revenue growth target for 2021 and pushed our growth inflection point into early 2022. On that recent call, we covered in great detail the challenges we experienced in Q2, specifically what happened, why it happened, and how we are addressing it. Let me first recap what happened and why. Then our CFO, Dave Risto, will walk you through our financial details for Q2, which as you may have seen in our earnings release today, we're largely in line with or a modest improvement over the preliminary ranges we previously reported. Afterwards, I will discuss our plans and key initiatives for the second half of the year. To be clear, our leadership team is absolutely committed to this transformation, and our board remains confident in our near and long-term business prospects and organizational sustainability, and we'll share why in just a few minutes. So what happened? At a high level, sales cycles in Q2 lagged our initial estimates. This delay was based in part on lengthy procurement timeframes, More specifically, indecision about timing for returning to a hybrid office environment and other key decisions on work location and technology. Furthermore, it took longer than expected to align our legacy sales force with our new SaaS-based value-driven sales process, and our new SaaS sales team were slower than expected. Given the nearly universal move to a remote work environment accelerated by the pandemic, we had estimated a quicker ramp in sales productivity than we recently experienced in selling to our enterprise customers. We initially modeled this process as a five to seven month time frame. However, in practice, we now believe the complete ramp for new sales professionals to reach full productivity will likely take around 12 months. The elongated ramp due to the complexity of the sale, individual enablement, marketing implementation, and procurement time cycles. We also realized that the new SaaS resources in our customer success team took longer to hire than our sales and marketing personnel. In turn, the extended onboarding market conditions and resulting sales efforts caused our bookings velocity and new logo acquisition to be lower than originally modeled. Our initial new logo demand plan called for 25% inbound marketing and 75% outbound marketing. While we put a great deal of effort towards enhancing our updated enablement messaging, Launching new products, as well as expanding our go-to-market motions, we didn't gain the anticipated traction from our outbound marketing efforts, and looking back, we likely would have been better to focus on inbound marketing strategies. Inbound marketing is a critical element required to pull in more prospects, increase brand exposure, and create more brand authority. Nevertheless, the key learnings from these challenges have helped us to refocus our approach and prompted us to implement key adjustments in our business planning for the second half of 2021. Before I get into those plans, I'm going to hand the call over to Dave to cover the financials. Dave.
spk02: Thank you, TJ. And good afternoon, everyone. Turning to our Q2 results in more detail, revenue for the second quarter of 2021 was $5.9 million compared to $9.3 million in Q2 of last year. and up from $5.8 million in Q1 of 2021. The $5.9 million was at the high end of the range we had provided in our preliminary results last month. As we communicated, the year-over-year decline in revenue was due to a significant one-time license and appliance revenue we recognized in Q2 of 2020 from a single large customer. We also experienced slightly lower on-premise maintenance and support revenue in Q2 of 2021 due to cloud conversions and lower on-premise maintenance recognized for customers not using on-premise appliances due to remote working relationships. Subscription maintenance and support revenue for the second quarter of 2021 increased 9% to $5.1 million from $4.7 million in Q2 of last year and was up 2% from $5 million in Q1 of 2021. The $5.1 million was at the high end of the range we provided in our preliminary results and was driven by new cloud and term deals. Subscription as a percentage of total annual recurring revenue was 49% for the second quarter of 2021, compared to 41% for the second quarter of 2020. Looking at our SaaS metrics, subscription ARR increased 28% to $12.4 million, up from $9.7 million in Q2 of last year. The 28% growth was primarily due to increased subscription renewal rates and cloud conversions, as well as increased SaaS sales. The $12.4 million in annual ARR exceeded our preliminary results. ARR has grown 7% during the first half of 2021, driven primarily by three meaningful on-premise to cloud conversions and a new key customer. We continue to anticipate ARR will grow as bookings of mid and large enterprises ramp with our SaaS sales efforts and as our on-premise customers convert to our SaaS platform. Our efforts to drive subscription ARR growth is anticipated to provide us with good visibility into future revenue due to the ratable recognition of subscription revenues. All of our SAS renewal rates have increased since Q2 of last year. At quarter end, our SAS gross renewal rate, or GRR, was 93%, compared to 87% at the end of Q2 last year. Our SAS net renewal rate, or NRR, was 132%, compared to 118% at the end of Q2 of last year. And finally, our SAS dollar value retention was 104% compared to 96% at the end of Q2 2020. Looking at our margins, gross margin for the second quarter of 2021 was 74%, an improvement from 69% in Q2 of last year. Driven by a favorable sales mix and higher margin SAS revenue, The 74% exceeded the range that we had provided in our preliminary results last month. Looking at our profitability metrics, net loss for the second quarter of 2021 totaled $4.3 million or a $0.24 loss per basic share and a $0.30 loss per diluted share. This compares to a net loss of $692,000 or a $0.05 loss per basic share and a $0.06 loss per diluted share in Q2 of last year. Our net loss for Q2 2021 was in line with the range that we had provided in our preliminary results. Adjusted EBITDA loss and non-GAAP metric for the second quarter of 2021 totaled $4.5 million compared to the adjusted EBITDA income of $809,000 in Q2 of last year. our adjusted EBITDA loss came in better than the range we had provided in our preliminary results. As expected, the higher adjusted EBITDA loss we reported in Q2 of 2021 was due to the strategic investments we are making in connection with our strategic roadmap. Moving to our balance sheet, at quarter end, we had a healthy liquidity position with $21.3 million in cash and cash equivalents. As we discussed on our June 29th call, we initiated a cost optimization program to align our expenses with our new level of anticipated revenues. This includes reducing our burn rate, slowing our hiring, and implementing other cost cutting measures to ensure adequate working capital to support our SAS transition. Our cost optimization program, implemented early in this third quarter, is expected to result in more than $4.5 million in annualized expense savings compared to annualized expenses in the second quarter of 2021. This expense reduction came from all functional areas but focused on administrative functions and included both headcount and outside services providers and other costs. We remain focused on our SAS go-to-market efforts while preserving our capital resources. To be sure, These measures will create more focused, a more nimble, and more efficient organization. We have the capital resources, including more than $21 million in cash, that will ensure sustainability as we execute our long-term SAS growth initiatives. Along the way, we will continue to monitor spending closely as we march towards adjusted EBITDA positivity expected late in the second half of 2022. with the goal of maintaining a solid cash position throughout this process. Looking at our financial outlook for 2021 to provide better insight into the progress of our SaaS business transformation, we are providing a business outlook based on the percentage of recurring revenue comprised of SaaS subscription revenue. For the second quarter, or for the quarter ended June 30th, 2021, SaaS recurring revenue was approximately 49% of the overall recurring revenue, as compared to 46% for the quarter ended March 31st, 2021. The improvement in SaaS recurring revenue as a percentage of recurring revenues due to on-premise to cloud conversions, incremental cloud customer expansion, and new customers. Future consolidated revenues will be dependent upon many factors, including existing customer renewals, the rate of adoption of the company's software solutions, in its targeted markets, whether arrangements with customers are structured as perpetual term or SaaS licenses, which impacts the timing of revenue recognition and success of our efforts to drive customer conversions from on premise to cloud. As part of the company's long term strategic roadmap, the company is accelerating the evolution of its SaaS business. a SAS-based business model with a cloud-first focus, which is expected to shift a greater proportion of revenues to SAS license revenues, which is recognized over the term of the license. Sumos Management currently anticipates SAS recurring revenue to comprise approximately 60% of its overall recurring revenue mix by the end of 2022, with a targeted growth to approximately 70% by the end of 2023. other factors that will influence future consolidated revenues, including the timing of customer orders and renewals, the product and service mix of customer orders, the impact of changes in economic conditions, and the impact of foreign currency exchange rate fluctuations. For a more detailed analysis of our financial results, please refer to today's earnings release as well as our Form 10-Q. This completes the financial summary, and TJ, I'll turn it back over to you. Thank you, Dave.
spk03: Now that we have covered what happened and the related financial results, I'm going to discuss our key go forward initiatives, which will enable us to achieve profitability and also our updated growth goals. My objective is for you to take away three main points from my remarks. First, we have the right plan and sufficient resources to execute on our plan without the need to raise additional capital. Second, We have the dedicated leadership team with the right experience to successfully execute the plan. And third, we have a solid and growing SaaS business that is supported by improving SaaS metrics. Now with that, let me pivot to our plan for the second half of the year and some of the specific strategies we're executing on. We have adjusted our expenditures in Q3 to take into account the longer ramp of our sales team. We have refined our sales strategy and product pricing based on specific customer use cases. That change has helped to define how we land more customers and how we then expand into additional use cases. Supporting these efforts, we have supplemented our historical technology focused sales approach with a line of business sale focused to drive greater land and expand possibilities. Speaking generally, the technology sales process has undergone a radical change over the last several years. Most companies today no longer want to make very large upfront investments, but instead are focused on procuring lower-cost subscriptions and value-added services. As a result, the features and functions of technology are now less important when compared to the business outcome or return on investment achieved by using the technology. Enterprises simply want to solve the business problem they are experiencing and to leverage key technology that makes them more productive, efficient, and effective. The traditional make-sell-ship business model, with the key milestone of landing the customer, has given way to one focused on preventing churn. To that end, we recently implemented the five-phase customer engagement model that focused on attract, land, adopt, expand, and renew, also known as the ALEER methodology. Let me briefly touch on each phase. The first phase attracts focuses on the recognition that Kumu solves significant communication issues for Fortune 500 and Global 2000 companies and has for years been their trusted enterprise video platform. We also provide robust professional and consulting services to assist enterprises with both quickly and properly implementing their improved communication strategies and leveraging best video practices to address their particular use cases. The second phase, LAND, involves the key activities required to land the first sale to a new customer and the initial implementation of that solution. The third phase, adopt, ensures the customer successfully adopting our solution, learning new ways of leveraging our technology to improve their work, their productivity, and their results, and expanding their use of Kumu's solution into new use cases as well as other parts of the organization. The step is also where we help the customer successfully use our solution to achieve their desired business outcomes. The fourth phase, expand, involves the activities required to cost-effectively help current customers expand their capabilities as their usage of our platform increases, including adding additional capabilities and leveraging partners and alliances. The fifth phase, renew, includes all activities required to ensure the customer timely renews their agreement with us and sees the important value that Kumu brings to their enterprise. This phase is key in ensuring our customers are realizing the significant value we bring and seek to maintain and further expand our offerings. Simple by design, this proven framework will enable us to successfully deliver positive customer outcomes, retain customers on our platform, and then get them to expand their use of the Kumu platform, which is ultimately what will drive increased profitability, long-term growth, and sustainability. In parallel with our Allure framework, We have judiciously invested in strategic sales initiatives, including field enablement with new messaging, product training and systems, which has provided us with key data and valuable insights to identify what's working well and where we need to adjust. Additionally, our focus on partners, sales management and sales coaching has aligned our direct and indirect sales motions. We have done this while conserving cash and reducing our burn rate in Q3 compared to Q2. Another key initiative for us is to extend Kumu's footprint and value to customers through strategic partnerships. We have doubled down on our channel strategy, including developing more channel offerings and investing in channel relationships, teams, and programs. Earlier this month, Kumu and SocialLive announced a new SaaS video streaming integration that allows businesses of all sizes to produce scalable, studio-quality video content and manage and deliver that content to any audience. The integration is the result of a growing partnership between our two companies where we are leveraging our combined expertise to enhance video content creation, management, and distribution capabilities for businesses. The integration provides customers with a seamless self-service experience from video creation, storage, and delivery to management, measurement, and insights on their video consumption. We are really excited about the partnership and the potential it has for both of our businesses. From a marketing standpoint, we have placed significantly more emphasis on our inbound marketing initiatives to drive new logo generation and are keeping our customer success team laser-focused on renewals and expansion. Our new account-based marketing campaigns targeting both large and medium enterprises continue to gain traction, and our customer success efforts are deepening relationships with our customers and driving solid SaaS retention metrics. Our entire focus from a sales, marketing, and account management perspective is to ensure we are keeping our customers at the center of all of our decision making. We are continuing to make progress on converting our on-premise customers to the cloud or upgrading them to our latest software versions on-prem. This process will help us drive towards long-term reliability and maintainability if a customer is still on-prem or to successfully migrate them to the cloud if that is the best fit for their enterprise. Over time, these conversions will add to a larger subscription mix of our total business. To be sure, we do not anticipate all customers to make the transition, but we are encouraged by the cohort that has already converted and the prospects we are currently nurturing. We also have commitments from a number of our existing on-premise customers to upgrade to our latest on-premise software versions that provide them with more capability and even more reliability. We are fully committed to our enterprise customers, whether they are leveraging our on-premise installations, As employees return to the office, we're utilizing our SaaS cloud platform for both highly distributed remote and hybrid work environments. From a leadership standpoint, we have significantly strengthened our team from top to bottom. This includes bolstering our customer-facing teams, adding experienced SaaS sales executives, and appointing world-class business leaders. Most recently, we announced Andy Mann as our chief technology officer, who joined Kumu a few weeks ago. Andy will lead our technology efforts to deepen and enhance our enterprise video portfolio, including expanding our advanced capabilities to generate video platform insights that provide important business intelligence to our customers, ensuring best-in-class cloud security. Andy will also be leading up our innovation function, working with our customer success organization to anticipate market needs and address customer requests and requirements. Andy brings to QEMU more than 30 years of experience leading digital transformation efforts for companies like BMC Software and CA Technologies. He recently served as Chief Technology Advocate for Splunk, where he drove Splunk's machine learning-focused business growth and product innovation through SaaS transformation, agile development, cloud operations, data and analytics, and cybersecurity. And his deep understanding of digital transformation and cloud software expertise will be central to our next phase of video content creation, management, and analytics. His professional experience applying technology to achieve business results, combined with his enthusiasm for leveraging technology to bring people together, is a tremendous asset to our company as we continue to expand the possibilities of human engagement through enterprise video. With Andy's appointment, Kumu's leadership team is undoubtedly the strongest and deepest in company history, and the collective experience gives me absolute confidence in our ability to execute on our long-term strategy. The executive leadership team is now fully staffed and committed to driving the next phase of our transformation at Kumu to a growing and profitable SaaS business. With Rose Bentley as our chief operating officer, Jen Demas as our chief marketing officer, Chad Sears as our chief customer officer, Dave Risto as our chief financial officer, and Jason Karp as our chief commercial officer, and Alex Couture as our SVP of global sales, the leadership team believes in the future of Kumu and how we will enable our customers to succeed in the new way that they work. and that the future of work has changed forever. We believe that Kumu can drive significant new capability in enterprises of all sizes, and that this transformation of where we work and when we work will define how enterprises create value and drive business success. SaaS businesses are built on strong foundations of people, process, and technology, and we have now put in place the foundation for our long-term success. Our go-to-market motions targeting both large and medium enterprises are gaining traction. Our improved customer success efforts are deepening customer relationships and driving growth in our subscription ARR and continuing on-prem to cloud conversions. As we transform our business, our focus remains on delivering SaaS recurring revenue growth. As you evaluate our results in business performance, it is important to keep in mind that we are not starting from square one. As Dave mentioned at the end of Q2, our SaaS ARR was $12.4 million, up 28% year over year. This is already a very meaningful SaaS business, and the subscription growth is a key milestone for Kumu. It demonstrates that our strategic roadmap is yielding results, and we remain committed to taking the necessary steps to continue to accelerate our subscription revenue growth as we fully ramp our sales teams. We will continue to drive our SaaS business through our direct sales teams, our new customer success and account management organization, and our newly invigorated channel and partnership ecosystem. which will enable us to scale and accelerate the value we deliver to our customers. Looking ahead, hybrid work and the use of video by enterprises is here to stay. And Kumu is building for the long-term success of the company and its shareholders. We have the right plan and the right team in place and the resources to ensure sustainability and the successful achievement of our strategic roadmap. We may have reduced expenses and planned in a slower ramp, but we remain confident that Kumu will emerge as a subscription-driven growth company operating at scale in the future, benefiting from high margin recurring revenues, sustainable and growing adjusted EBITDA, and net income profitability. We will now take your questions. Operator, please provide the appropriate instructions.
spk04: As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound or hash key. Please stand by while we compile the Q&A roster. Your first question comes from the line of Mike Latimore from Northland Cap Market. Your line is now open.
spk01: Hi, guys. This is Anshul Sahu on for Mike Latimore. I have a couple of questions here. You talk about pricing based on use cases. What is the status of that initiative and what would be the main use cases?
spk03: Sure. I'll start off with the main use cases are crisis communications, CEO town hall and executive communications, marketing or product launches, onboarding for employees, and onboarding for customers. And that can also include learning management systems. So those are the main five that we most often get asked to address. And we have now updated to those use cases to be able to make it easier for our sales team to be able to make it quite clear what kind of solutions we can bring to them. And as they expand those use cases across a large enterprise, we can then add on additional capabilities as needed.
spk01: All right. And what are the top one or two priorities for your new CTOs?
spk03: Number one is helping to drive the technical innovation to make sure that we're meeting the future needs related to the move to the new work. And if we look at hybrid work being the majority of probably future work, as well as remote and on-premise work, really going to be critical that we continue to innovate to meet those needs of that new work. So the top priority for Andy is part of that. Also, he's overseeing both our on-premise hybrid and cloud capabilities and making sure that we have the best technology from all being able to be presented to our customers and to help drive that innovation in a timely manner.
spk01: Right, and has demand for virtual events slowed this year?
spk03: Virtual events may be more hybrid and virtual events now. We're seeing more conferences and events that do happen partially in person, but we're still seeing a demand for virtual events that are part of that hybrid event structure. So definitely still having a lot of demand for that video to go along with both in-person and remote events. And our corporations that are working with us from an enterprise video standpoint also continue to extend a lot of their work-from-home capabilities, and the timing of when they return to the office is still being pushed out into the future somehow, but there's still a lot of uncertainty for when people go full hybrid or go back into the offices that I think will trickle into the fall and potentially longer this year.
spk01: All right. Thank you.
spk03: Thank you.
spk04: Once again, to ask a question, please press star 1 on your telephone. There are no further questions. Thank you. At this time, this concludes the company's question and answer session. If your question was not taken, please contact Kumu's IR team at kumu.gatewayir.com. I would now like to turn the call back over to Mr. Kennedy for his closing remarks.
spk03: Thank you, operator, and thank you, everyone, for joining our call this afternoon. I look forward to speaking with you again soon. Thanks so much.
spk04: This concludes today's conference call. Thank you for participating. You may now disconnect.
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