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spk01: Welcome to CUMU fourth quarter and full year 2021 conference call. My name is Dilem, and I'll be your operator this afternoon. Joining us is CUMU's president and CEO, T.J. Kennedy, CFO Tom Kruger, COO Rose Bentley, and Matt Glover from Gateway Investor Relations. At this time, all participants are on a listen-only mode. After the speaker 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.
spk06: Thanks, Dylan, and good afternoon, everyone. After the market closed today, Kumu issued a press release announcing its financial results for the fourth quarter and year ended December 31, 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 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 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'll 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 site of Kumu's website. Now we'll turn the call over to Kumu's president and CEO, TJ Kennedy. TJ.
spk04: Thank you, Matt, and good afternoon to everyone on the call. Thank you for joining us. From a high level, our results for the quarter and the year demonstrate the continued execution of our strategic roadmap, which emphasizes growing our cloud business and scaling our SAS revenue base. Highlighting the success is the 35% SAS revenue growth we delivered in 2021, bringing our total SAS revenue to a record $10.2 million at year end. Our SAS revenue as a percentage of total revenue has grown from 18% of total revenue in Q2 of 2020 to 48% of total revenue for Q4 2021. This is a dramatic shift of our business to SAS in just six quarters. SAS revenue accounted for 56% of our total recurring revenue, exceeding our guidance for 2021 and giving us encouraging momentum as we begin 2022. SAS annual recurring revenue also grew by 16% in 2021, bringing the compounded annual growth rate for SAS ARR over the last two years to 40%, which we expect to serve as a strong benchmark going forward. Our SaaS revenue and ARR growth in Q4 and 2021 clearly demonstrate that our SaaS transformation is underway. As expected, our overall top line was down for the year, which was a result of certain legacy on-prem contracts sunsetting as we focus our attention on higher margin and recurring revenue deals. Our partner-led sales motions and customer success efforts are gaining momentum and driving new logos, deeper relationships, higher retention, and cloud conversions. In 2021, we completed five on-prem to SaaS conversions, and we expect to complete a similar number this year. Partner-generated revenue grew 25% to 2020, compared to 2020, and accounted for more than 30% of our total revenue in 2021. Looking at our costs, the optimization measures we implemented in the second half of 2021 have made us a more nimble and efficient organization. reflected by strong margins and reduced operating expenses, which we expect to maintain throughout the course of this year. That commentary provides a nice segue to introduce our new CFO, Tom Kruger, who joined Kumu last December. In less than four months, Tom has already made a marked impact on our finance organization and has helped to augment our ongoing evolution into a SaaS-first organization. For those that haven't had the pleasure to get to know Tom, he is a seasoned finance leader with more than 20 years of experience working with leading SaaS-centric and technology companies, including Coros, Meltwater, Salesforce, and Sun Microsystems. Prior to Kumu, he was acting CFO and VP of Finance for Coros, a $200 million SaaS-based customer engagement software company. Prior to Coros, he led FP&A for Meltwater, a $165 million SaaS-based social media monitoring business. And with that introduction as a background, I'll now turn it over to Tom to discuss our financial results for the fourth quarter and full year 2021. Tom.
spk05: Thanks for the warm welcome TJ. And it's great to be speaking with everyone this afternoon. I will expand on a few items not already addressed by TJ or included in our earnings release this afternoon. The metrics that we use to measure the success of our SaaS transformation continue to move in the right direction. During Q4, subscription ARR increased 16% to $12.8 million from $11.1 million in Q4 2020 and increased sequentially from $12.6 million in Q3 2021. At quarter end, our SAS gross retention rate, or GRR, was 91% compared to 80% at the end of Q4 2020. Our SAS net retention rate for NRR was 114% at the end of Q4 2021 compared to 141% at the end of Q4 2020. While NRR decreased compared to the prior year period, we believe that Q4 2021 retention rate of 114% reflects the value that our customers see in the Kumu solution and provides a solid foundation for continuing to expand into our customer base in future periods. Moving on to operating expenses and adjusted EBITDA, a non-GAAP measure. Expenses for 2021 and 2020 reflect the impact of our long-term strategic plan implemented in late 2020 as we transition to a SaaS-first business model. This transition prioritizes the use of resources for initiatives that grow recurring cloud revenue through the acquisition of new customers from an increasingly broad target market, vertical expansion within Kumu's customer base, and the conversion of existing customers from our on-premise solution to our SaaS solution. Such prioritization is reflected in higher costs incurred during 2021 and 2020 for sales and marketing initiatives. These initiatives are designed to build our sales pipeline by creating engaging content, building brand visibility, securing top rankings with industry influencers and analysts, investing in top management and sales talent globally, and onboarding new channel partners with resources, training, and ongoing support for immediate penetration into their client bases. Much of these costs were incurred within our sales and marketing function during the first half of 2021. as we were building the foundation for our SaaS transformation. These costs have since tapered as we focused on leveraging that initial investment, as sales and marketing expense for the second half of 2021 was $8.8 million, compared to $9.6 million in the first half of 2021, representing an 8% decrease. We will further focus and reduce sales and marketing expenses as needed to align resources with CUMU's strategic plan in 2022. The cost optimization measures we implemented during Q3 drove a 4% sequential decrease in our overall operating expenses, as operating expenses were $8.5 million in Q4 2021 compared to $8.8 million in Q3 2021. For the second half of 2021, operating expenses decreased to $17.3 million from $18.9 million in the first half of 2021, representing an 8% decrease. These cost savings during the second half of 2021 were also reflected in adjusted EBITDA, a non-GAAP measure which improved to a loss of $3.1 million in Q4 2021, compared to a loss of $3.5 million in Q3 2021. Net loss was $3.7 million for both Q4 2021 and Q3 2021. A reconciliation of adjusted EBITDA, a non-GAAP measure, to net loss, a GAAP measure, is included in our earnings releases for the respective periods. Now for the balance sheet. Cash increased to $20.6 million at the end of Q4 2021 compared to $18.2 million at the end of Q3 2021, as we drew $5 million on our line of credit during the fourth quarter. As of December 31st, 2021, we maintained a balance of $5 million on our line of credit and were in compliance with all borrowing covenants. We continue to manage cash closely and have seen improvement to cash burn after initiating our cost optimization program in the third quarter, 2021. We will continue to monitor expenses and leverage available financing to align expenditures with bookings and collections on our path to becoming cash flow positive. This concludes my prepared remarks. I'll turn it over to our COO, Rose Bentley, to discuss the key elements of our strategic roadmap and the traction we're realizing on key initiatives. Rose?
spk00: Thank you, Tom, and good afternoon, everyone. As TJ alluded in his opening remarks, a key component into driving new logos and generating SaaS revenue growth has been our partner-led sales motion, which is a tent pole of our transformational roadmap. Our partner strategy has reduced sales friction and facilitated higher velocity adoption of the Kumu platform because our partners know their enterprise customers' needs best and already have a value-based relationship with them. Large enterprise customers are also buying through the channel more than ever before because enterprise customers expect a level of integration, innovation, and end-to-end solution that only a partner-led strategy can provide. It's because of this favorable dynamic that we've placed even more emphasis on expanding our channel-led sales initiative to scale our customer footprint and create new and larger SaaS revenue opportunities for Kumu more rapidly. At the outset of this year, we made the strategic decision to flip our go-to-market strategy and place 80% of our focus on channel selling with the remaining 20% on our direct sales motion. A benefit of this model is that we're able to redirect resources and reallocate them towards expanding our partner network and partner success initiatives, both of which are yielding strong results demonstrated by our partner-generated revenue growing by 25% in 2020 and accounting for more than 30% of total revenue in 2021. To ensure we continue to see this level of investment in our partners' success in 2022 and build on the partner program we launched in Q3 of 2021, we are working closely with our partners in the program to integrate the Kumu Video Engagement Platform with their enterprise technology solutions to better meet their customers' needs while driving revenue. Today's global enterprises demand high quality secure video options for their workforce, and our partners recognize that having access to a leading cloud-based enterprise video platform is the way to make that happen. One of our active partners, TV Cinex, and its resellers are having great success incorporating the Kumu platform into their customers' technologies workflow, which we expect to start translating to new deals in the second half of this year. Our continued ability to deliver additional support and an enterprise video solution to our partners is just one example of our commitment to co-innovating with our partners. And we're able to provide the dual benefit of assuring they're able to offer a video solution into what they're bringing to the market with their customers today, and they can still stay ahead of the varied and evolving needs of today's organizations. Additionally, our partnership with GovSmart, a full-scale provider of IT products to the government, is building momentum. As we talked about on the last call, GovSmart was instrumental in helping secure our largest customer win in Q3. Many government sectors are working with outdated video solutions which impact how effectively teams can communicate from training to collaborating. GovSmart selected us to bring their government customers a video engagement platform that is scalable, configurable, and easy to use, but can also meet the most stringent security requirements and content creation needs. of federal agencies. The GovSmart prospect pipeline continues to build and prepare for the government buying season starting here in September. Perhaps one of our most exciting new strategic partners is with Collective, a provider of enterprise content delivery networking, or ECDN, infrastructure for internal communication. Collective incorporates enterprise-grade video into its software platform to deliver internal content faster, more reliably, and with less bandwidth to its network of customers. By combining Kumu's video engagement tools with collective delivery platforms, customers receive scalable video communication solutions. We're really excited about this partnership and we're looking forward to reporting on its success in the coming quarters. Now, at the close of last year and into this year, we have been working feverishly to bring differentiated and innovative partners into our ecosystem. Because our partner-led strategy is not only supporting how we go to market and acquire new customers, it also supports our current customer success and expansion strategy, which are critical pillars in our transformation to SaaS. Our customers today expect a secure and reliable enterprise-grade cloud solution. And as I spoke at the beginning of my remarks, Our enterprise customers expect a level of innovation and integration which yields a more streamlined and dependable end-to-end solution that meets their growing business needs. Our approach to how we are strategically building our partner ecosystem allows us to deliver more value for our current customers by providing them with end-to-end solutions they need to deliver against their video needs. Our channel-led strategy is keeping our customers at the heart of all that we do and every decision that we make. and on a path to leverage the best-in-breed video solution at scale. And with that, I'll turn it back over to you, TJ.
spk04: Thank you, Rose. As many of you have experienced personally, workplaces have been permanently transformed by the pandemic. As remote and hybrid work becomes the norm, the need for an enterprise-grade video platform that can provide the security, performance, features, and ease of administration has never been greater. Kumu is the answer. And it's not just us or our valued customers that have recognized the power of our platform. Kumu's video engagement platform has been recognized by several industry firms like Aragon Research and most recently the Cloud Awards, which included our cloud platform as a best software as a service finalist. Reflecting on 2021, it was a transformative year for our organization, and I'm incredibly proud of what the team accomplished. We scaled our cloud offerings, expanded our partner network, converted key on-prem customers to the cloud, and delivered robust SaaS revenue growth. We also established a comprehensive ESG framework grounded on one of Kumu's key organizational truths, work from wherever, whenever, which impacts both the environmental and social areas. If you haven't done so already, I encourage you to visit our ESG page located within the investor relations section of our corporate website. Looking ahead, The progress we're making with partners and strategic alliances is gaining traction, which we believe will translate to more results starting in the second quarter of this year. As we continue to transform our business, we are focused on delivering robust SaaS revenue growth, which will be driven by new customer and expansion bookings sourced through the channel in 2022. Based on our success driving SaaS revenue and ARR in 2021, we are increasing our goals for 2022. We now expect SAS recurring revenue as a percentage of a recurring revenue to be at least 65% by the end of 2022 and 75% of recurring revenue mix by the end of 2023. Longer term, we are confident that Kumu will emerge as a subscription driven growth company operating at scale, benefiting from high margin recurring revenues, sustainable and growing cash flow, and adjusted EBITDA and net income profitability. We will now take your questions. Dylan, please provide the appropriate instructions.
spk01: Thank you, sir. As a reminder, to ask a question, you would need to press star 1 on your telephone. To withdraw your question, please press the pound key. Please stand by while we compile the Q&A roster. I show our first question. It comes from the line of Jeff Fenry from Craig Holland. Please go ahead.
spk03: Hey, guys, a couple for me. It's been a little bit, but I know you had historically given a metric or several metrics around platform usage. Talk to, I don't know how you can quantify just the activity on the cloud with respect to the platform and how it's changed.
spk04: Yeah, great question, Jeff. This is TJ. One of the things that we've seen is the high peaks that occurred during COVID have started to plateau significantly. But our overall usage is still way higher than pre-pandemic, and we continue to see growth in our cloud platform with the amount of both number of meetings and events that are happening, as well as the total amount of video, total number of live streams, and the amount of storage. We're seeing more and more customer security store more and more video. We have stopped continuing to report out on just the daily changes in that, but we have seen that plateau from the peak that we had during COVID But we definitely see just an ongoing incremental increase now, both to the amount of meetings and events being held, the amount that is being stored, as well as the total number of live streams.
spk03: And does that hold on a per-customer basis as well? I know you're adding more customers as you migrate people over to the cloud, but on a per-customer basis, the activity levels?
spk04: Yeah, I mean, it's good question, Jeff, and we haven't necessarily sliced it and diced it that way from a public reporting perspective. But it's a fair question. I think some of our pandemic uses that really had grown in individual customers, we have seen some of that plateau, but we still see that their usage is much higher than it was pre pandemic. So it's less has less surges or spikes to it as it had during the pandemic. And it's much more regular now, but it's still at a higher level than pre pandemic.
spk03: Okay. And how, just sort of shifting gears, obviously we've got, oh, sorry about that, we've got a number of ARR or retention metrics that you've shared with respect to the SAS side. But can you talk to the PREM side? I know you've given kind of a percent of revenue mix, but there's a number of variables in there that remain unknown. So PREM, talk about kind of what you're seeing on the retention side and maybe how that is likely to translate into the maintenance number over the next several quarters?
spk04: Yeah, good question. I'll have Tom go ahead and dive into that. Tom?
spk05: Sure. We're seeing gross retention for the on-prem business be in the 70% range, which is giving us headwind on that maintenance revenue. So we do expect that to be coming down in the future.
spk03: Mm-hmm. Okay. And then just a couple other quick ones, if I could. On the cash flow, how do you think about the path to cash flow? Do you have any targets you can share when you think we'll get to break even, or how do you think about cash flow for the year?
spk04: Tom, once again, do you want to go ahead with that?
spk05: Sure. We are – We do expect to see some burn in the beginning part of this year, but we are pushing towards cash flow break even. We will be much closer to that in Q3 and Q4 this coming year. And we expect to be cash flow positive in the beginning, in Q1 of 2023. Okay.
spk03: Q1 of 2023, helpful. And then I guess just lastly, so back to the cloud briefly, on the ARR front, How should we expect that number over the next couple quarters? I know it's been blipping up gradually. It looks like it was down just modestly in Q4. How do you think about it for Q1 and progression through 22?
spk04: Yeah, at a high level, I think what we're going to see is we're 16% today on ARR growth. I think we're going to see that gradually increase in the latter half of the year. I think we'll see it start to pick up more in Q3 and Q4.
spk03: Okay, got it. And obviously, I think the messaging is you see that being driven by channel, as you've definitely made the all-in shift on channel.
spk04: That's correct. We made the 80% in just to, instead of all, I would say that we definitely have shifted to, you know, focused on that 80% channel-driven growth, and we do think that a lot of that Q3, Q4 growth will come due to those new channel relationships becoming more prolific in the latter half of the year.
spk03: Got it. Okay, I'll let somebody else jump on. Thanks for taking my questions. Thank you, Justin.
spk01: Thank you. I'll share our next question. It comes from the line of Sharon Caruba from Northland Securities. Please go ahead.
spk02: Hi, guys. This is Sharon on behalf of Mike Latimore of Northland Securities. My question is, how many salespeople do you have now and where might the number go this year?
spk04: Very good question, Sharon. So, This year we have – hang on one second. I'm just going to double-check my notes to make sure I get the exact numbers right. We have about 26 personnel that are in sales in our go-to-market account management customer success. We see that number being fairly steady at that level this year, and we see that they will be working very closely with our channel and partnerships to continue to excel growth. We will adjust to those channels that are more prolific from a resource perspective, but that's where we see ourselves being this year.
spk02: Okay, great. And then what percentage of your base has migrated to the cloud?
spk04: So today what we've talked about is about 65% of our base from on-premise has either done one of two things. They've either converted to the cloud or in process of doing so, or they have upgraded to our latest greatest on prem versions, which is 10.4 10.5 releases. And so over the past two and a half years or so, that's what we've seen happen and pretty successful transition. We saw last year that about five specifically transition to the cloud and we expect a similar number here in 2022. Thank you. Thank you, Sharon.
spk01: Thank you. I'm sure no further questions 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 at gatewayir.com. I would now like to turn the call back over to Mr. Kennedy for his closing remarks.
spk04: Thank you so much, Dilemma. We really appreciate your help, and thank you for everyone joining our call this afternoon. I look forward to speaking with you again soon. Thanks so much.
spk01: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.
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