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spk04: Hello, and welcome to Kumu's second quarter 2022 conference call. My name is Chris, and I'll be your operator this afternoon. Joining us at Kumu's, President and CEO Rose Bentley, CFO Tom Kruger, and Matt Glover from Gateway Investor Relations. At this time, all participant lines are in listen-only mode. After the speaker presentation, there'll be a question and answer session. To ask a question during that session, you'll need to press star 1 1
spk08: your telephone i would now like to turn the call over to matt glover sir you may begin thanks chris 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 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 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 as a result of new information, future events, or otherwise, except as required by law. Please refer to Kumu's SEC filings, specifically its Form 10Q 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 this non-GAAP financial 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 is being recorded and will be made available for replay via a link available in the investor relations section of Kumu's website. Now I'd like to turn the call over to Kumu's President and CEO, Rose Bentley. Rose?
spk01: Thank you, Matt, and good afternoon, everyone. We appreciate you taking the time to join our second quarter conference call. To begin, we remain incredibly encouraged by the continued progress we are making in our transformation to SaaS. The strategic investments we've made over the last 18 months and our team's ability to execute against that plan are driving strong operational and financial results. As we continue to grow our cloud business, build our partner ecosystem, and further transition to a purely subscription-based model, We expect our performance to improve throughout the balance of 2022 and beyond. Highlighting our success in the quarter was a 10% increase in both SAS revenue and SAS ARR. Our SAS revenue as a percentage of total reoccurring revenue in Q2 accounted for 61%, up from 60% in the prior quarter, and 49% in Q2 last year. This is in line with our goals and has us well on track to achieve our SaaS growth targets for 2022 and 2023. Our cloud transformation initiatives and increased SaaS contributions also helped produce a gross margin of 75.4 during Q2, which we expect to continue as SaaS becomes a greater portion of our overall top line. Along with our transformation to the cloud being on target, we are progressing and marching towards cash flow breakeven. We used $4.9 million and $3.7 million of cash for operating activities in Q1 and Q2, respectively. We expect cash used in operating activities to come down significantly in Q3 and Q4, ensuring we have the runway we need to complete our transformation to the cloud. Now, we have a lot to cover today, so before I go any further into updates from operations, I'll now turn it over to our CFO, Tom Kruger, to provide more detail on our Q2 financial performance and key SAS metrics. Tom?
spk07: Thanks, Rose. It's a pleasure to be speaking with you today. Like last quarter, I will expand on a few items not already addressed by Rose or included in our earnings release this afternoon. The metrics that we use to measure the success of our SAS transformation continue to move in the right direction and reflect our team's continued execution of our growth strategy. Now let's look at them. As Rose highlighted, SAS revenue for Q2 2022 increased 10% to $2.8 million compared to $2.5 million in Q2 2021. SAS annual recurring revenue, or ARR, for Q2 increased 10% to $13.3 million from $12.2 million in Q2 2021 and increased 2% sequentially from $13.0 million in Q1 2022. SAS revenue for Q2 accounted for 61% of recurring revenue, up from 60% in the prior quarter and 49% in Q2 2021. As a percentage of total revenue, SAS revenue accounted for 54% unchanged from Q1 2022 and up from 43% in Q2 2021. Our SAS retention rates remain strong with our gross retention rate, or GRR, of 90% at quarter end and net retention rate, or NRR, of 103% at quarter end. Moving down the income statement, for the second quarter of 2022, gross margin was 75.4%, up from 71.5% in Q1 2022, and 73.6% for Q2 2021. The improvement in gross margin was due to our continued shift from on-premise to the cloud through our SaaS-focused business model. We expect to maintain mid-70% gross margins for the balance of 2022.
spk06: Moving on to operating expenses and adjusted EBITDA, a non-GAAP measure.
spk07: Our transformation is also focused on rationalizing our cost structures and realizing efficiencies to reduce cash burn. Our total operating expenses in the second quarter of 2022 were $7.0 million, down 15% sequentially and 27% year over year. It's important to note that our OPEX for the second quarter of 2022 reflects a one-time non-cash gain from the reversal of stock-based compensation related to our prior CEO's departure. We anticipate that our normalized FX run rate for the third and fourth quarters will be approximately $7 million per quarter. Of course, we will continually look for ways to further optimize our cost profile without sacrificing our ability to execute our growth strategy. Adjusted EBITDA. A non-GAAP measure in Q2 2022 was a loss of $3.1 million, an improvement compared to a loss of $4.1 million in Q1 2022 and a loss of $4.5 million in Q2 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 Q2 2022 totaled $2.6 million or $0.15 loss per basic and diluted share. This compares to net loss of $4.6 million or $0.26 loss per basic and diluted share for Q1 2022 and net loss of $4.3 million or $0.24 loss per basic share and $0.30 loss per diluted share in Q2 2021. Shifting gears to the balance sheet. At quarter end, we had $6.4 million of cash and cash equivalents and no debt, which is in line with our internal plan. The sequential decrease in cash reflects the repayment of the $5 million we borrowed on our line of credit. As Rose mentioned, net cash used in operating activities improved to $3.7 million, compared to $4.9 million in Q1 2022 and $6.1 million in Q2 2021. We expect a significant reduction in net cash used and operating activities in the second half of 2022. We continue to believe that our cash position and available liquidity resources provide sufficient runway to execute our SaaS growth transformation strategy and achieve cash flow profitability. That concludes my prepared remarks.
spk06: I'll turn it back over to Rose to discuss our strategy, key partnerships, and outlook. Rose?
spk00: Thanks, Tom.
spk01: Kumu's improving financial performance and strong, fast key performance indicators reflect the increasing success and momentum of our partner-led sales strategy and our current customers growing their investment with Kumu as their trusted provider of both live and asynchronous video content. For context, in Q2, we added new customers at twice the rate of Q1. Additionally, more than 80% of our new bookings in the first half of 2022 were sourced or influenced by our partners. of which only one did not include Kumu's cloud solution. In Q2, we won a multinational specialty chemicals company and a global professional services firm, both of which are ranked in the Global Fortune 2000. Another noteworthy customer win in Q2 was with ProPrep, a UK-based leading provider of high-quality, customized learning resources. ProPrep is doing important work to support STEM students and educators and to enhance the already proven value of video as an educational tool. Kumu's video engagement platform enables ProPrep to ingest, tag, and sort video content at scale. Videos are easily searchable with the degree of flexibility students need to customize study materials based on the institution they attend as well as the courses they are taking. Online learning has increasingly been in the spotlight over the last two years, and we are thrilled to be working with ProPrep to help make it more accessible and effective. The last Q2 customer win I'd like to highlight is a top 20 ranked health insurance provider and included a three-year commitment based on our capability to deliver a best-in-breed customer experience and our ability to leverage our partner ecosystem. As one of the U.S.' 's largest integrated healthcare companies, this customer's requirements were complex. Through collaboration with our partners, collective for network stabilization, and socialized for video production, Kumu was uniquely qualified to meet virtually all of the healthcare provider's extensive requirements for its new enterprise video solution. We were able to successfully meet the customer's needs without incurring the capital expense or time required to build out these capabilities in-house. Overall, our growing partner ecosystem gives us the opportunity to deliver more value to our future and current customers by providing them with the end-to-end solution they require to deliver against their video needs. Our continued investment in our partner-led strategy keeps our customers at the heart of all that we do in every decision that we make and on the path to leverage the best in-breed video solution at scale. Simply put, our partner network is letting us compete and win opportunities that we could not pursue on our own. Our partnership with GovSmart, which we formed late last year, broadcasts Kumu's enterprise video capabilities to hundreds of government agencies. As we move through the federal government buying season, we are excited to continue to expand our footprints in the sector with a partner that truly cares about their customers and understands their unique needs. Although we're only five weeks into the third quarter, we've already secured a new deal with the unit of Department of Defense and have received additional RFPs as well. For GovSmart's customers, our ability to provide reliable and secure video communications, solve complex behind-the-scenes network issues, consistently deliver a high-quality experience, and provide insights to improve engagement and effectiveness is compelling and differentiating. And these capabilities are equally compelling to other markets with complex needs and stringent security and regulatory requirements. That's why our partner, our new partner, AT&T, recently turned to Kumu to help a major financial services enterprise address challenges it was encountering when hosting multiple live meetings at once across the business. I recently met with several of their senior executives to discuss ways to further extend our partnership across more of AT&T's verticals and markets. We're working closely with their team to build pipeline, and we believe we are well positioned to close on several deals by year end. It's not just large enterprises like AT&T or GovSmart that recognize the power of Kumu's cloud-based video platform. During Q2, Wayne House Research positioned Kumu in the top right quadrant of its newly revised vendor landscape for behind-the-firewall streaming solutions. This is the seventh time Kumu has been placed in the top right quadrant for the enterprise video landscape. AT&T and other global 2,000 organizations trust Kumu for their video communications and achieving their business goals at scale. In fact, over the last 12 months, Our customers have added 51% more authorized users to our platform. And we have seen an increase of asynchronous video views go up by over 30%. The growing investment from our enterprise customers is exemplified by our average annual contract value, or ACV, increasing by 474% year over year for the first half of 2022. Triple-digit growth in the contract size of our new customers demonstrates our ability to deliver deeper value through additional use cases when we acquire new customers. Furthermore, this substantial growth helps to expand our footprint and create additional value realization for our new customers. In parity with this, our SaaS ACV for the first half of 2022 increased by 559% compared to the same year-ago period demonstrating growth in our cloud, on-prem, and hybrid customer contracts. The growth momentum in enterprise video use corresponds with how organizations increasingly operate with end users working from anywhere, on any device, at any time, and connecting to corporate resources in internet accessible cloud platforms. Companies globally continue to be challenged by the pandemic, constrained labor, and global shortages of raw materials. It has become more critical for them to rethink and reprioritize how they engage with their employees, customers, and partners, making video a critical tool in their tech stack. It is the cornerstone of digital transformation for the enterprise. Our organizational theme entering 2022 was execution. The progress we've made and the results we've delivered in the first half of 2022 validate that we are executing our strategy and building momentum. Remote work, whether it be fully remote or hybrid, is here to stay, which bodes well for continued demand for enterprise video capabilities. Our ability to win new business at an accelerating clip validates that our product is needed and enterprise capable. Our partner ecosystem is proving to be a compelling differentiator, and our SaaS transformation is working, validated by our improving KPIs, robust gross margins, and reduced cash burns. In summary, Kumu's transformation is well underway. Our investments in 2021 are yielding strong returns in 2022. Our business is optimized and now hitting its stride. Our plan is supported by our solid cash position and available resources that provide significant runway to execute our growth strategy. We entered the third quarter with a record pipeline of opportunities that we are converting at an escalating pace. Our partner-led sales strategy is gaining momentum and creating repeatable sales motions that gives us confidence in our ability to secure a record number of new logos. Going forward, we continue to expect our SAS reoccurring revenue as a percentage of total reoccurring revenue to be at least 65% by the end of 2022 and 75% by the end of 2023. We continue to expect to cross over to cash flow breakeven during 2023. the leadership and board remain confident that Kumu will emerge as a subscription-driven growth company operating at scale, benefiting from high-margin reoccurring revenue, sustainable and growing cash flow, and adjusted EBITDA and net income profitability. We will now take your questions. Chris, please provide the appropriate instructions.
spk04: Thank you. As a reminder, To ask a question, you'll need to press star one one on your phone. Please stand by as we compile the Q&A roster.
spk02: One moment.
spk04: Our first question will come from Mr. Jeff Van Ree of Craig Hallam. Please proceed.
spk05: Great. Hey, Rose. Hey, guys. So a couple questions. Maybe first, Rose, on the pipeline, sounds like you're happy with the bookings momentum and the pipeline growth. Can you dial that in a little more? Is there something quantitatively maybe you could share about the size of the pipeline? And then any insights into the composition of the pipeline? And then along that same vein also, some sense of magnitude of the increase in bookings?
spk01: Yeah. Thank you, Jeff. I appreciate the question. Yes, as we think about how we are building pipeline, we continue to see the magnitude grow specifically on the need at the enterprise. You hear me spoke in my prepared remarks around the growing momentum and hitting twice as much logo volume in Q2 compared to Q1, and we expect to carry that momentum into Q3. If you think about the pipeline, it's giving me the pipeline coverage, which you would expect or what I would expect to need to be able to deliver against our bookings plans. I'm not in a position yet to give exact coverage of where we're at on that pipeline, but I will be soon, Jeff. So I appreciate the question.
spk05: Sounds good. And then, Tom, just on the cash flow breakeven, I guess you've commented that you cross over to that breakeven point at some point in 23. Can you give us a little sense of what you think that revenue crossover line might be, even within a range?
spk06: The –
spk07: I think it's going to be, I'm not sure the exact number, I think it's going to be close to 30 million of ARR, total ARR, we may need to get to. It'll have to be, you know, we're growing right now and we'll continue to grow and we'll reach there at some point next year.
spk05: Okay. All right. And then last, just in terms of buyer behavior, I mean, obviously, inflation, wage pressures, recession, coming out of COVID, all kinds of dynamics going on. Can you just talk about sort of the backdrop and to the degree that competitive landscape is relevant and part of that as well?
spk01: Yeah, certainly, Jeff. So as we look ahead and as we really think about how we plan the business, we are being very cautious and optimistic around how we make sure we're preparing the business for the future. when I think about what we're accomplishing today and what we are focused on today, on how we do that, is really on delivering our bookings plans and keeping our focus on retaining the customers we have and scaling into the enterprise. When I look at the competitive landscape, we continue to be turned to by the top enterprise brands to solve complex problems for them. So the competitive landscape remains consistent for us. And we expect to continue our growth in enterprise specifically and we continue to expect the dedication that we are and internal respect on bookings. That is our number one focus on how we continue to deliver for you, Jeff.
spk05: Sounds good. I'll leave it there. Thank you.
spk01: Thank you.
spk04: Thank you. And again, to ask a question, please press star 1-1 on your phone.
spk02: Stand by as we compile the Q&A roster.
spk04: At this time, this concludes the company's question and answer session. If your question was not taken, please contact QMU's IR team at QMU at gatewayir.com.
spk03: I will now like to turn the conference over to Rose Bentley for closing remarks.
spk00: Thanks, Chris, and thank you, everyone, for joining our call this afternoon.
spk01: With so much underway here at Kumu, I've begun to issue periodic updates on our social channels to highlight our company's operational progress and milestones. Please follow us on Kumu's Twitter or LinkedIn to automatically receive these updates. And I look forward to sharing more about our ongoing transformation in the coming weeks and months. Back over to you, Chris.
spk04: Thank you. This concludes today's conference call. Thank you all for participating. You may now disconnect and have a pleasant day.
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