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spk04: My name is Kurt Wright. I will be your operator this afternoon. Joining us are Kumu's President and CEO Rose Bentley, CFO Tom Krueger, and Matt Glover from Gateway Investor Relations. At this time, all participant lines are in 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 1-1 on your telephone, and that will enter you into the queue. I would now like to turn the call over to Matt Glover. Sir, you may begin.
spk05: Thanks, Kurt, and good afternoon, everyone. After the market closed today, Kumu issued a press release announcing its financial results for the third quarter ended September 30, 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, 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 10-Q, 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 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'd like to remind everyone that this call is being recorded and will be made available free play via 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.
spk00: Thank you, Matt, and good afternoon, everyone. And thank you for joining us today. To start off, early in our third quarter, I completed the proverbial first 100 days as Kumu's CEO. As the well-known saying goes, time flies when you're having fun. I am certainly enjoying collaborating with our team, driving meaningful business value for our partners and our customers alike. My first 100 days focus on continuing to execute on Kumu's staff transformation strategy, delivering a best-in-class customer experience, and doubling down on our partner-led go-to-market motion. The strategic investments we made in our customers and our partners' ecosystem over the last 18 months continue to yield strong returns. Additionally, retention and renewals were especially strong during the quarter with renewals coming from Unicredit, Birmingham County Football Club, and Pediatric Oncology Center, Princess Maximum Centrum. From a financial standpoint, during Q3, we built on the momentum we established in the first half of 2022 and delivered solid growth across our key SAS metrics, including SAS revenue, SAS reoccurring revenue, and SAS revenue as a percentage of our top line. Most notably, we generated a 6% increase in SAS revenue and a 7% increase in SAS annual reoccurring revenue, or ARR. As well as, we expanded our SAS revenue as a percentage of reoccurring revenue to 62%. And we were able to deliver these growth results while dramatically reducing our OPEX and cash usage. Overall, Kumu's improving financial results and strong SaaS KPIs reflect the increasing success momentum of our partner-led sales strategy and our current customers growing their investment with Kumu as their trusted provider of live and asynchronous video content. I'll now turn the call over to Tom to provide more details on our Q3 financial performance and key SaaS metrics. Tom?
spk06: Thanks, Rose. It's a pleasure to be speaking with you today. Similar to last quarter, I will expand on a few metrics that Rose highlighted, which are also included in our earnings release that we published after the market closed. The metrics that we used to measure the success of our SaaS transformation continue to move in the right direction and reflect our team's continued execution of our growth strategy. As we enter the final stages of our cloud transformation, we still believe these metrics most accurately reflect our performance and business going forward. As Rose highlighted, SAS revenue for Q3 2022 increased 6% to $2.8 million compared to $2.6 million in Q3 2021. SAS ARR for Q3 increased 7% year-over-year to $13.5 million and 1% sequentially from $13.3 million in Q2 2022. SAS revenue for Q3 2022 accounted for 63% of recurring revenue up from 61% in the prior quarter and 52% in Q3 2021. We are on track for SAS recurring revenue as a percentage of total recurring revenue to be approximately 65% by the end of this year and approximately 75% by the end of 2023. As a percentage of total revenue, SAS revenue accounted for 51% compared to 54% in Q2 2022 and 41% in Q3 2021. Our SAS retention rates remained strong with a gross retention rate of 92% at quarter end, and our net retention rate was 100% at the end of Q3. Now, moving down the income statement. For the third quarter of 2022, our gross margin was 77.5%. up from 75.4% in Q2 and 76.0% in Q3 2021. The improvement in gross margin was due to better margins on SAS revenue recognized compared to Q2 2022, a higher percentage of SAS revenue contributing to the overall sales mix compared to Q3 2021, and improved utilization of professional services personnel. We expect to maintain gross margins in the mid-70s for the balance of 2022 and first half of 2023. Moving on to operating expenses. As Rose alluded to, Kudu's transformation thus far has not only been focused on our SaaS journey, but also on optimizing our cost structure and realizing efficiencies to achieve cash flow breakeven. We're really encouraged by our success in these key areas and the fact that we've been able to drive down our OPEX over the last several quarters. Along that line, OPEX in the third quarter of 2022 was $6.2 million, down 12% sequentially and 30% year over year. We anticipate that our normalized OPEX run rate in the coming quarters will be approximately $6.5 million per quarter. Proactive cost rationalization has been a consistent highlight during the first nine months of 2022. enabling us to improve quarterly cash used and operations each quarter from $4.9 million in Q1, $3.7 million in Q2, and $1.4 million in Q3. While we've made great strides improving our cash used and operations, we will continually look for ways to further optimize our cost profile without sacrificing our ability to execute our growth roadmap. Looking at our profitability measures, adjusted EBITDA, a non-GAAP measure, in Q3 2022 totaled a loss of $1.6 million, an improvement from a loss of $3.1 million in Q2 2022, and a loss of $3.5 million in Q3 2021. A reconciliation adjusted EBITDA to net loss, a GAAP measure, is included in earnings releases for the respective periods. Net loss in Q3 2022 total $1.4 million or $0.08 loss per basic and diluted share. This compares to a net loss of $2.6 million or $0.15 loss per basic and diluted share for Q2 2022 and a net loss of $3.7 million or $0.21 loss per basic and diluted share in Q3 2021. Shifting gears to the balance sheet. At quarter end, we had $6.0 million of cash and cash equivalents including $1.2 million borrowed from our line of credit. We continue to tightly manage cash as seen through our reduction in cash usage over the course of 2022. We expect a continued reduction in net cash usage over the coming quarters as we realize further benefits from our cost reduction measures and our high-velocity, lower-cost, partner-led sales model. That concludes my prepared remarks. I'll turn it back over to Rose to discuss our strategy, key partnerships, and our outlook. Rose?
spk00: Thanks, Tom. Over the past several quarters, our theme as a company has been validation through execution. Our team's consistent operational execution has validated our strategy and enabled us to enter the final phase of our SaaS transformation journey ahead of plan. Our channel partner strategy has been validated by the volume of opportunities we are seeing as well as the rate of which we are closing new business. In fact, our new logo count for the first nine months of the year exceeds all new logos we secured in 2021, and we continue to see over 80% of our new bookings being sourced by our partners. Partners such as British Telecom and VQ were key contributors to our new logo additions in Q3, which included a multinational security chemicals company and a global professional services firm. We also secured a win with a unit of the Department of Defense through our partnership with Guzman, which we believe will continue to lead to additional wins within the government sector. In addition to the exciting customer wins that we have secured in the quarter, we continue to advance our partnership with AT&T. As I mentioned on our last call, we met with AT&T leadership in August to explore further opportunities to strengthen our relationship. I'm excited to report that we will be working together with AT&T to expand their go-to-market efforts with Kumu's video engagement platform. This multifaceted program will provide AT&T with numerous value add functions, including product management, marketing communications, channel marketing, sales operations, and professional services for the launch of its Kumu-powered enterprise video as a service offering. We have already received preliminary acceptance for several elements within the program and expect to see resulting revenue and purchase orders as soon as next quarter. Additionally, we further evolved our SaaS enterprise by taking an obvious next step collaborating with Google to deliver our Kumu video engagement platform to Google Cloud Marketplace. By combining our industry-leading expertise with Google's massive engagement, we expect customers to derive enhanced value from this partnership. We are in the early days of our partnership with Google, but we are encouraged by our ability to share customers and deliver targeted account mapping and build pipeline together for 2023. An exciting trend that we have seen over the course of 2022 is an increasing trust in the Kumu brand providing strength and support for our growth initiative. As we head into Q4, our pipeline for renewals and new customers is incredibly strong in building and being fueled by continued momentum in our partner-led strategy. Many of the renewals we completed in Q3 as well as Q4 renewals include an expansion of our customer relationship. Customers are increasing their internal usage of Kumu platform resulting in a broader network of technology partners and new enterprise use cases for us to target going forward. A growing number of renewals secured in Q3 were for multi-year contracts, and we expect future renewals to follow suit. In fact, for the first nine months of 2022, three-year contracts account for nearly 20% of our renewals. These long-term contracts reflect the confidence our customers have in our cloud-based solutions and unmatched level of customer service. During a recent quarterly business review with one of our clients, they remarked, you simply will not let us fail. This statement is a powerful testament to the standard of care and quality of service that we hold ourselves accountable to here at Kumu. Looking ahead at Q4, we expect to see meaningful contributions from our value partners, British Telecom and Collective. In December of last year, we announced our partnership with Collective along with the launch of the Kumu Partner Program. and it is exciting to see the ongoing synergies blossom from this partnership. The right partners are accelerating Kumu's entry into new markets, strengthening our competitive positioning, and teeing up repeat business. The third quarter was key in building the trust that fuels our customer engagement. We successfully brought down our cash usage from operations, further stabilizing our runway as we complete the final stage of our cloud transformation, and work toward cash flow break-evens. Going forward, our plan for the rest of 2022 is to ensure that the last of our marquee customers are seamlessly transitioned to the Kumu cloud platform and double down on our momentum from the partner led strategy. We expect to continue to monetize our partner relationships and discover synergies that will ultimately be reflected in our bottom line results. As I shared in my most recent CEO dispatch, our three year vision for Kumu is to achieve $50 million in revenue as a profitable and predictable company by the end of 2025. The strategic investments we have made into the business over the past several years position us to now focus on scaling outwardly and promoting our platform through our network of partners and collaborators. The benefits of our transformation will become increasingly evident in growth and reoccurring revenues later this year and into 2023. We will now take your questions. Kurt, please provide the appropriate instructions.
spk04: Thank you. At this time, we will conduct a question and answer session. As a reminder, to ask a question, you will need to press star 1-1 on your telephone and wait for your name to be announced. Please stand by while we compile the Q&A roster.
spk03: And we have some questions coming in right now.
spk04: And our first question will come from Jeff Van Ree with Craig Hallam Capital Group. Go ahead, sir.
spk01: Hey, guys. Thanks for the call. This is Daniel on for Jeff. Just a quick question on the pipeline. Just curious, as you're talking about the opportunities with partnerships, if you can give us any sense for how the pipeline has evolved in size and scope versus, say, three, six months ago.
spk00: Yes, certainly. Happy to answer that. Thank you for the question. As we explore the pipeline, as we think about what we're building around the enterprise, we continue to see enterprise brands want to explore and invest in video. So the expectation of the enterprise consuming that video and growing that pipeline, we are still continuing to see. When we reflect back over a year ago, we had grown our pipeline over 70%. And if you even look at even just the past six months, we're continuing to see that pipeline evolve. and set us up for success in Q4 and into 2023.
spk01: Thank you. And then just on the splits between revenues that are recurring versus, sorry, excuse me, got lost in my notes here a second. Just on subscription versus broader growth, can you give us a sense of how we should be thinking about subscription growth moving forward, just sort of broadly?
spk00: Yes, certainly. So for us, subscription growth has been, if you look at just like the SaaS overall growth and subscription growth, it will be the number one priority focus for us. So if you think of SaaS, we've been seeing it decline, but it's because we're going through the cloud transformation and we're converting those into subscription-based business. So I would expect the subscription-based business to moderately grow as it has been. We don't expect to see a decline in that growth. We expect to see that at least maintain, if not grow moderately through 2020, through the end of the year and into 2023.
spk03: Thank you. That's all for now. Thank you for the questions.
spk04: Thank you so much. And we have another question here. I'm just pulling it out of the queue. Our next question comes from Palani Vivekanakan from JMN Investment Research Group. Go ahead, sir.
spk02: Hi, I'm Vivek on behalf of MyGlatimo. I have about a couple of questions here. The first one is, have you guys seen any sales elongation given microeconomic concerns?
spk00: I'll take that one. So we are continuing to see digital transformation be a priority for the enterprise. We are also continuing to see that the power of the incumbent is one of the reasons our redemption and renewal rates are so strong. It's there. I think as we start to examine how enterprises will behave going forward, I think we are all watching and acknowledging the uncertainty in the current market and that 2023 needs to be de-risked due to some of the stabilization in the demand. But at this point today, we are not seeing this slow, but we expect, as I said, to start being very smart and acknowledge, I think, some of the uncertainty in the market as we start to reflect into 2023 in our planning.
spk02: Great. My second question is, what have been the biggest use cases in demand?
spk00: Oh, yeah. So by far, right, it's short-form video, so asynchronous content or consumption of video. Across our customer base, 100% of our customers consume video asynchronously, and there's a lot more user-generated content because of that, right, because they're consuming and creating content on their own. We continue to see, of course, a decent size of our customers leverage live events and live communication. But that is becoming less and less because I think people are understanding that the blended workday is changing and that people expect to consume content when they want to consume it, and especially when you're trying to manage a lot of the global audiences.
spk02: Great. I have one last question with me. Please. Hello. Am I audible? Yes, you are. I can hear you. Yeah. The last question is, did you see any customers turn off on your on-premise software to third-party SaaS providers?
spk00: Did we see any on-premise churn? Is that the question?
spk02: Yeah. On-premise software services. For on-premise software services.
spk00: Yeah. So coming into the year, we continue to forecast a decline in that maintenance revenue and in that on-prem revenue. So the short answer is yes. We do see customers on the on-prem business choose to either stay on-premise, not embrace the digital transformation and move to the cloud, or continue to potentially choose or go with another vendor. That is something that we continue to see as we transform to the cloud.
spk02: Great. That's it from my side. Thank you. Thank you.
spk04: Thank you so much for your questions. At this time, we'll conclude the company's question and answer session. If you have a question that's not taken, please contact Kumu's IR team at qumu.gatewayir.com. Now I'd like to turn the call back over to Ms. Bentley for her closing remarks.
spk00: Thanks, Kurt, and thank you, everyone, for joining our call this afternoon. If you haven't done so already, I encourage you to follow Kumo on Twitter or LinkedIn to automatically receive my ongoing CEO dispatches for better color on up-to-date initiatives underway here at Kumo. Back over to you, Kurt.
spk04: Thank you for joining us today. This will end the conference and the Kumo's third quarter conference call. You may now disconnect.
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