BrightView Holdings, Inc. (BV) Q2 2015 Earnings Report, Transcript and Summary

Greetings and welcome to the Bazaarvoice Fiscal Second Quarter 2015 Financial Results Conference Call. [Operator Instructions] I would now turn the conference over to Ms. Linda Wells, Investor Relations’ Director for Bazaarvoice. Thank you Ms. Wells. You may now begin.

Good afternoon, and welcome to today's conference call to discuss Bazaarvoice's financial results for the second fiscal quarter of 2015 ended October 31, 2014. I'm joined today by Gene Austin, our Chief Executive Officer and President; and Jim Offerdahl, our Chief Financial Officer. Following the remarks from Gene and Jim, we'll have a question-and-answer session. Please note that we’re simultaneously webcasting this call on our Investor Relations website at investors.bazaarvoice.com. The earnings release with our results for the second quarter of fiscal 2015 was issued after the market closed today Please remember that certain statements made during this call, including those concerning our business outlook and guidance, growth plans and opportunities, potential acquisitions, outlook on legal matters, sales execution and ability to capitalize on our opportunities are all forward-looking statements. Forward-looking statements are subject to a number of risks, uncertainties and assumptions that are described in our SEC filings, including the Risk Factors section of our Form 10-K for the fiscal year ended April 30, 2014 filed with SEC on June 26, 2014. Additional information will also be set forth in our future quarterly reports on our Form 10-Q and our Annual Reports on our Form 10-K and other filings that we make with the Securities and Exchange Commission. Should any of the risks or uncertainties materialize, or should any of our assumptions prove to be incorrect, actual results could differ materially and adversely from those anticipated or implied in these forward-looking statements. We do not intend or undertake no duty to release publicly any updates or revisions to any forward-looking statements made during this call. The divestiture of PowerReviews was completed on July 2, 2014. As a result of this, PowerReviews’ revenues, related expenses and loss on disposal net of tax are components of loss from discontinued operations in the condensed consolidated statement of operations since our fourth quarter of fiscal 2014 and all comparative fiscal quarters presented. The statement of cash flows is reported on a combined basis without separately presenting cash flows from discontinued operations for all periods presented. Some of the numbers that we will discuss today during this call will be presented on a non-GAAP basis. Today’s press release, together with the accompanying finance tables, contains the calculations of these non-GAAP financial measures and a full reconciliation between the corresponding measure, GAAP measure and the non-GAAP measure including the reconciliation of GAAP to non-GAAP operating results from continuing and discontinuing operations. With that, I would now like to turn the call over to Gene.

Thank you Linda and thank you all for attending today’s call. The second quarter produced continued progress on many fronts for Bazaarvoice. We delivered accelerated revenue growth that exceeded our guidance and significantly improved our EBITDA. Additional highlights included another good quarter in terms of new client acquisition and launches and we ended the quarter with active clients of 1258, an increase of 28% year-over-year. Halfway through this fiscal year, I am pleased with the improvements we have made in operating our business. I’m also happy to share with you all that we have resolved the recent investigation by the Department of Justice. On our last earnings call, we told you that we had received a letter from the DOJ on August 20th, indicating that they were investigating whether Bazaarvoice had discontinued use of two technologies in a timely manner as part of the divesture of PowerReviews. The investigation has now been resolved, subject to court approval of minor revisions to the proposed final judgment which will have no material impact to our business. I believe this will be the last update I give you all on the Department of Justice and PowerReviews. Moving on to our financial results for the second quarter, total revenue was $47.3 million, an increase of 15% year-over-year and better than our guidance. Adjusted EBITDA loss of $1.8 million and non-GAAP EPS loss of $0.05 were also better than our guidance. We have previously shared with you our revenue growth rate goal of 15% to 25%. And I'm pleased that we were able to achieve 15% growth in the second quarter, up from 11%, just two quarters ago. This achievement comes on the heels of a lot of hard work by the Bazaarvoice team to shore up the overall performance of our company on many fronts. When I became the CEO of Bazaarvoice, I had committed to you all that we would reverse the trend of decelerating revenue growth by improving sales execution, investing in client satisfaction and retention in getting the innovation engine in our company started again. I pledge to do so while inheriting the company that had just lost the trial to the DOJ and faced a complicated divestiture process. Had weak overall operating cadence and possessed lower employee morale and yet just nine months later, we have successfully moved on from the DOJ, restored employee confidence and commitment and strengthened our business. A good start but there is more work ahead. We remain committed to further improving our growth and profitability metrics, which will require yet another notch of overall effort in execution of our company. Let me talk to growth, since it remains our top priority. Getting our revenue growth to a higher level will be driven by better sales execution, increased sales capacity, strong client retention and additional new offerings that unlocked the value of our network. At this point, I am most pleased with our progress on dollar retention. In fact, last quarter for the first time in several quarters our dollar churn percentage was lower than our client churn, a good taste of what should lie ahead if we continue to focus on our clients’ interest in new programs. Most of the progress to date has come from a much higher focus on client retention issues and better management of the client renewal process. The next step is to make further investments in product quality, customer service and technical support that provide systemic changes to the experience our clients have each and every day. Those programs are underway and we expect to see the fruits of those investments payoff over time. For example, we launched best practices consulting business designed to help our client optimize their strategy and results around user generated content produced from our core offerings. Previously, we had charged very little for professional services. So this is a great opportunity to layer on more revenue while simultaneously helping clients derive more value from Bazaarvoice and solidify them for years to come. Turning to sales, Bazaarvoice has had a history of consistent North American performance. While our performance overseas can best be described as lumpy, for example, Asia-Pacific, while producing smaller numbers is doing quite well after a poor fiscal 2014. Meanwhile, Europe had the strongest quarter in its history at close fiscal 2014, but has been behind our internal plan during the first half of this year. In order to grow our bookings to support higher growth rates, we need more consistency internationally, especially in Europe. In both international regions, we have made leadership changes in the last 12 months and I believe those leaders are building teams that can deliver improved results. At the same time, we have refocused our go-to-market strategies in those regions around winning the key retailers that will provide the foundation for strong brand adoption. In North America, we are fortunate to have over 60 of the top 100 Internet retailers, which have led thousands of brands to adopt our solution. This has been a phenomenal strategy domestically and will be the underpinnings of our international plan. The early returns are promising with nine new retailers joining from Europe in the last six months. Looking ahead to the second half of this fiscal year, Bazaarvoice’s had a history of much stronger second half bookings than the first. And our pipeline heading into the third quarter is healthy and robust. Also, I’m pleased with our November start including Europe. Now let me comment on the progress to date around product innovation. We launched our first ever Client Advisory Board back in September with some of our largest clients to discuss their thoughts around Bazaarvoice’s future strategy to capitalize on the power of social content, the scalability of our network, the richness of our datasets and ubiquity of mobile. Our clients resoundingly told us that they see UGC as a critical component of the digital strategies now and in the future. And they want us to provide more ways to capture, publish and amplify that content to drive stronger awareness and sales for their products and services. The first wave of new products that we introduced early this year aligns directly with the feedback from our clients to strengthen our UGC position. We called the Curations at new content types such as photos, tweets, videos, while local extends our core ratings or review offering for the local dealers and the agents of national brands, as well as for specific locations for national and regional retailers. We also broadened conversations with product sampling, which bolsters our capabilities to influence new product introductions. I'm particularly pleased with early success we are having with Curations and the largest developing pipeline for local. Up next on our product roadmap, our solutions enhanced SCO performance of the large volume of UGC that we collect in order to derive much higher levels of traffic to our clients’ product pages. Also, we continue to unlock more and more value from our large and growing network of brands and retailers. For sometime now, we have allowed brands to syndicate their review content to all of the retail partners to strengthen the conversion rate of shoppers to buyers. Recently, we released analytics to both retailers and brands, giving them insights into the power of syndication and the impact it is having on traffic and conversions. Soon our analytics will go even further and allow our clients to measure the overall performance of a particular brand versus the competition across all of its retail partners in our network. This is just one of a steady stream of new products and features aimed at providing a true network view of a brand’s competitive strengths and weaknesses. Longer term, we have the opportunity to allow brands and retailers to reach in-market shoppers with the right content at the right time wherever they are shopping on our network. We have a very large number of active shoppers on our network, over 560 million unique visitors each month who engaged with reviews, photos and videos during their purchase journey. Combined with data based on past review and purchase behavior, we have the opportunity to proactively deliver influential marketing messages in the form of user-generated content that is contextually relevant to a person specific shopping interest, resulting in a more personalized engaging experience. As you can see, Bazaarvoice’s engine of innovation is up, running and picking up steam. I'm excited about our ability to proliferate UGC, the value our network represents now and in the future and the opportunity, the combination represents for our ability to deliver unique products that reach in-market shoppers. Now let me comment on some additional highlights of the second quarter. Our media business delivered a strong second quarter with revenue of $2.1 million, an increase of roughly 70% year-over-year. We entered the active holiday quarter with good momentum in the business and have an innovative product on the horizon that will allow for enhanced personalization of media based on the data inside our network. Early feedback from our test client is very positive. As in a side, this is the basis for some of the innovative strategies I just spoke about. In terms of partnerships, last quarter I shared with you that we are partnering with our retail clients to add brands to our network. Retailers increasingly want to speed up the process of getting brands integrated into their UGC strategies. We're pleased with the initial progress we're seeing in this regeneration program, with the vast majority of our new Connections clients coming up from this program. In fact in the second quarter, we added over 500 new Freemium Connection clients, bringing network clients to over 2,300 more than double from the year ago. We also expanded and extended our partnership with Google, with an agreement to accelerate our content-sharing relationship. Today, over 20 million reviews for more than 300 Bazaarvoice clients are now front-end centered in Google Shopping and on product listing ads, providing tremendous exposure and increased consumer traffic. Finally, we provide strong validation for the importance of user-generated content. Broadly, Gartner spoke to the opportunity UGC presents for marketers to enhance commerce experience and increase conversions. More specifically, Gartner highlighted product reviews and ratings as the primary driver behind social commerce revenue for both retailers and brands. And requirement for doing business online in a market where real lines of distinction are being drawn between leaders and challengers, I believe market analysis such as these positions Bazaarvoice among the premier vendors for marketers and digital commerce leaders. With over 3,600 total clients, the size of our network is a clear indication of the value we drive for our clients each and everyday. In the second quarter, the content of our network received more than 64 billion impressions, an increase of 30% year-over-year. On Black Friday alone, the traffic on our network grew 60% from the prior year’s Black Friday. In summary, I’m pleased with the progress we've made in rebuilding the Bazaarvoice business today. We grew 15% year-over-year, scaled the business with a proven EBITDA and made good progress in our core operations. As we look forward, our focus remains growth and we are investing to strengthen client retention, build our international business and restore steady stream of innovation to our pipeline of products. There is a lot of hard work ahead but I’m excited to lead this committed team forward. I will now turn the call over to Jim.

Thank you, Gene and thank you to everyone who joined the call today. Today, we are reporting results for our second quarter of fiscal 2015 ending October 31, 2014. For the second quarter we achieved total revenue of $47.3 million, up 15% year-over-year and above our guidance. We achieved SaaS revenue of $45.2 million, up 13% year-over-year. Net media revenue was $2.1 million, up a strong 70% year-over-year. Adjusted EBITDA for the second quarter was a loss of $1.8 million, a significant improvement from the loss of $5.5 million in the same period a year ago, due primarily to higher revenues and to gaining significant efficiencies in both SaaS and media sales and marketing activities. Our non-GAAP net loss per share was $0.05. Launches for the second quarter were again strong at 117, up 36% from 86 in Q2 of last year. Looking forward note that launches tend to be sequentially lower in our fiscal Q3, as many of our clients do not make changes to their websites during the holiday shopping season. Net new client additions in Q2 continued at a steady pace of 61. Our client retention rate was 95.3%. We ended the quarter with 1,258 active clients, an increase of 278 or 28% from a year ago. Annualized SaaS revenue per average active client in the second quarter was a $147,000, down $5000 from the prior quarter. We continue to expect our annualized revenue per client to decline somewhat in the future, as we add new clients at initial pricing that is lower than our company average. We view this as healthy for our network and our business, consistent with our land and expand approach, especially as we introduce new and innovative products, such as Curations. Gross margins were 65.2% in Q2, down from 70.8% in the same period last year, as we have increased our investment in retention by adding resources to our Client Care team in implementation to support this addition of new clients and in professional services to support recent higher sales and best practice consulting services. In addition, we continue to incur higher amortization of capitalized software from our innovation investments. As we have stated previously, we expect gross margins to remain in the mid-60s for the rest of this fiscal year. Sales and marketing expenses were $17.5 million and represented 36.9% of revenues this quarter, as compared to $19.7 million or 47.8% in the same period last year. Our sales and marketing expense has generally been lower this year, because, as I noted earlier, we are gaining significant efficiencies in both SaaS and media sales and marketing activities during FY '15, as we leveraged our more experienced sales force, gained sales overhead efficiencies and more products and services to sell. We expect sales and marketing expenses to range in the upper 30s to lower 40s as a percent of revenue for the remainder of FY '15. R&D expenses were $8.5 million, representing 18% of revenue this quarter, as compared to $8.9 million or 21.6% in the same period last year. This expense was down slightly year-over-year, as we capitalized the higher amount this year related to new product development activities. For FY '15, we continue to expect our dollar investment in R&D to be higher than last year, especially in the areas of innovation and new products, even though we expect to continue to gain some leverage year-over-year as a percent of revenue. G&A expenses were $6.6 million and 14% of revenues, down from 14.6% last year, as we continue to gain economies of scale. We achieved annualized revenue per average employee of $236,000 in the second quarter, up 9% from $217,000 in the same period a year ago and we ended the quarter with 814 employees. Moving on to the balance sheet. We have a solid balance sheet with $82.5 million in cash and cash equivalents as of October 31, 2014. Subsequent to quarter end, we completed a new three-year $70 million credit facility to replace a $30 million facility, which would have expired at the end of this calendar year. As part of that transaction, we paid down the $27 million we had borrowed on the old facility and we chose to take down $57 million on the new credit facility. Our DSOs for the second quarter was 78, similar to Q1. Our deferred revenue balance was $54.9 million at the end of Q2, compared to $49.6 million at the end of Q2 last year and $59 million at the end of Q1. As I said in prior calls measuring changes in deferred revenues is not a good proxy for bookings during the quarter, as we typically have a varying mix of billing frequency with average upfront billings of less than one year. That said contributing to the sequentially lower deferred revenue in Q2 was a large client and in Q1 move from billing in arrears to billing in advance with both such billings occurring in Q1. Moving on to cash flow, cash used from operations of $9 million included $1.9 million spent on divestiture in DOJ investigation related activities. CapEx was $3 million in Q2, of which $2.5 million was capitalization of developed software as we continue innovation on our new platform and new products. Now I would like to finish with our financial outlook. As Gene mentioned, we are increasing our revenue guidance for fiscal year 2015 and now expect total revenue to be in the range of $190.4 million to $192 million, up 14% year-over-year at the midpoint of the range. We’re also improving our outlook for adjusted EBITDA and non-GAAP net loss per share for fiscal year 2015. We expect adjusted EBITDA loss to be in the range of $13.5 million to $14.5 million and non-GAAP net loss per share to be in the range of $0.28 to $0.32 based on 79 million weighted average shares outstanding. While our top priority remains growth, we continue to make good progress towards profitability. Now turning to guidance for the third fiscal quarter of 2015. We expect total revenue to be in the range of $49.1 million to $49.7 million, which represents a 13% increase in the midpoint of the range. This implies a revenue guidance range of $48 million to $49 million for the fourth quarter. As you know, Shopper Media is highly seasonal and correlates to increases of online retailer traffic and brand marketing efforts around the holidays. As a result, our third fiscal quarter is typically the strongest quarter of the year for media revenue, which means it is typical for total revenues for the fourth quarter to decline sequentially from third quarter. For the third quarter, we expect adjusted EBITDA loss to be in the range of $1.9 million to $2.5 million. Non-GAAP net loss per share is expected to be in the range of $0.06 to $0.08 based on 79 million weighted average shares outstanding. In summary, we continue to make good progress on our overall business operations. We are pleased to have the DOJ litigation fully behind us and we remain committed to achieving higher levels of revenue growth while improving profitability. Before I turn the call over for questions, I would like to remind everyone that we will be presenting at the Credit Suisse Technology Conference tomorrow in Scottsdale, Arizona and the Needham Growth Conference in January in New York City. With that, Operator, please turn the call over to questions.

Thank you. [Operator Instructions] Our first question is from Brendan Barnicle of Pacific Crest. Please go ahead.

Thanks so much, Gene. You highlighted some of the things you were looking to improve on the sales execution side particularly, on the international side. Is there anything domestically you are looking to focus on to improve that team any?

Well, Brendan, overall, I just think the sales performance for international remains my biggest priority. We made a leadership change about a year ago and really feel like I’m building the right team there but we’re off to a slower start in the first half than would have like to had. Domestically, I think, we’ve been doing a really good job of expanding our footprint with brands, both large and small. Lot of the new account acquisitions’ results that we talk about and the growth of new accounts has come mostly from domestic expansion in small-medium businesses and the Connections area. So I think, generally speaking with North America, we have a significant second half pipeline built up. So I think I’m pretty happy, generally speaking where I think, North America is going to finish for 2015. We have had a very strong November both in North America and Europe. So -- and generally speaking, I feel like we’re tracking where we should be in North America. We’re a little weaker than we want to be right now in Europe.

Great. Thanks. And Jim, you gave us that retention rate, I think it was 95.3%. I think that’s down a bit from last quarter, anything in particular, it’s leading to that, if I have that correct?

No, not really. It’s mainly some smaller accounts, which again we’ve been saying all along that smaller accounts churning are okay. But -- and we’re doing better on our larger accounts.

Great. Thanks, guys.

Thanks, Brendan.

Thank you. The next question is from Greg Dunham of Goldman Sachs. Please go ahead.

Hi. Thanks for taking my question. I wanted to hit on the sales particularly, related to some of the new products. And Curations has been out since May. Now you have a couple quarters that are still. How did that perform in the quarter? And then the on flip side, how did the Conversations perform in the quarter as well? I know that that got off to a little slower start in Q1?

Curations has continued to exceed our expectations. I think we had fairly low expectations, kind of, going into the year on Curations and has done quite well. So I feel good about the progress we’ve made in Curations. I would say, Conversations reflects -- since Conversations is a lion share of what we sell today. It reflects some of the commentary I made earlier about sales, which is that internationally it’s behind where I like it to be. And -- but as I look at the pipeline of large opportunities, ahead for the company in the second half, I think the majority of them are Conversations and very long Conversations. So November was strong for sales in general as well as Conversations. So I think, going forward Conversations is going to land about what I thought it would land as I look at the whole year.

Okay. Great. One quick follow-up for me. You mentioned briefly in the script the accelerated content sharing agreement with Google. Can you talk about how that relationship is different? What is new today? And how is your relationship with Google kind of evolved over the years? Thanks.

Sure. I mean, the important thing about Google relationship is that we see 20 million reviews to Google that they are using predominantly in Google shopping but also in product listing ads. I can't really go into a lot of detail. We have a mutual confidentiality agreement. But I can just tell you that the SEO performance for the customers is a huge opportunity and a very big part of our value proposition. And this relationship with Google is extremely -- has expanded the overall exposure that our clients reviews will be getting based on their activity -- based on consumer activity on Google. So I think it’s nothing, but the most important headline on this is an expansion of the current relationship we’ve had with Google and a continued commitment to each other to help each other’s business.

Okay. Helpful. Thanks, guys.

Thank you. The next question is from Jennifer Lowe of Morgan Stanley. Please go ahead.

Great. Thank you. I wanted to touch just quickly again on the international market and some of the difficulties you’re having there versus the U.S. And I guess the question is, is this entirely something that that you think is execution related and just a function of getting the right people and leadership there and doing that a little bit differently? Or is there something structurally different at the international market, either culturally or competitively that’s creating additional obstacles for you there?

No, I don’t think it’s entirely execution. I think there’s a couple of factors in place. One is, as I mentioned in the call, we had a strategy in the U.S. basically to go and attract as many retailers as possible out of -- in the early days of Bazaarvoice in the U.S. Our approach in Europe has not been as focused on retailers as it could have been. And so as you look at Europe and you compare Europe to the U.S., the Bazaarvoice network in the U.S. is just much more strong -- much stronger. And so the value proposition to grab more brands is more compelling. And so as I stated in the call, refocusing our efforts on retailers we’ve identified who those are, we added nine in the first half, which was a very strong start. We’ll also contribute to overall performance in Europe. I do want to make one comment about Europe is that one of the thing -- one of the bright spots in Europe is we are beginning to see stronger results out of the continent. The U.K. has traditionally led all of our efforts for that business in Europe. And now we are actually starting to see a lot better improvement in Paris and Munich offices, so I think that’s a bright spot. Generally speaking with Europe, we set a plan that was reasonably aggressive on growth. I think we may have gotten ahead of ourselves on that plan, we are behind that plan. But I still feel like that team is coming together, our go-to-market strategy is sound and we’re going to see increased results going forward.

Great. And then just a quick question for me on churn. Clearly, the churn rate was lower this quarter than it was last couple, there is some unique circumstances in the past, but to the extent that you have put the churn and some of the initiatives there to get the churn levels down. Do you anticipate that that metrics should be stable to improving going forward? Or are there situations that you see or we might see some additional churn over the next couple quarters beyond kind of what you saw this quarter?

Well, churn, there is a lot of factors involved in churn. And I think the trend line is directionally in the right -- going the right way. I mean, I think, we’ve made a lot of improvement in our overall ability to manage churn and manage the renewal process. But each quarter there is a different size pool of candidates up for renewal. So your churn dollars can go up and down, merely by the fact of how many contracts are up for renewal. So it’s going to fluctuate. I think the way to look at churn is a year-over-year comparison and where we think and where we see the trend lines going, kind of a four quarter quadrant. My commentary today on the dollar churn being better than customer churn, I think we said repeatedly that the fact that our customer churn rate was lower that our dollar churn rate was a problem. We’ve been saying that that’s not the way our business should be operating. This quarter, it was the right way. But we also are not saying that it’s going to stay the right way from here on out. We certainly think we can get there, but it’s going to take additional investments to some of the things I talked about earlier. So in summary, the trend line I believe is going in the right direction. I think we are going to see fluctuations, but the company's ability to manage churn, manage our customers and manage the renewal process is dramatically better than it was a year ago.

Okay. Thank you.

Thank you. The next question is from Kevin Liu of B. Riley. Please go ahead.

Hi. Thanks for taking the question. I guess, first question for me is just -- can you talk a little bit more about the decision that’s going out further on the credit line, seems like you guys are showing improvements on the adjusted EBITDA loss line. So just wondering if you are looking for heightened investments going into the business moving forward or whether there is any sort of other cash outflow you are anticipating such as an acquisition?

Yeah. Kevin, this is Jim. We did close the new credit line with five banks, frankly is oversubscribed and we just choose to drawdown majority of that line just like we had chosen to drawdown the majority of the credit line but no particular reason, primarily flexibility. And regarding acquisitions, I mean, the new line could provide room if and when we are to make one, but obviously we have no comment on that.

Got it. And maybe if you could just comment on the competitive environment and obviously with PowerReviews back as a stand-alone entity, talk a little bit about what you are seeing from them, as well as other competitors out there? And maybe just a quick comment on international as well, is that a cause of your sales execution issues at all?

Kevin, the competitive environment is noticeable in the U.S. with PowerReviews. We see them in select accounts as we would've expected and so that continues and I’m very comfortable in our competitive posture vis-à-vis them. In Europe, there is definitely regional competitors in each of the major country. And when I made the comment earlier about the fact that our network score is not as strong in Europe as it should be, that makes us more susceptible to the federation in Europe and/or price pressure, if you will when we are competing in a deal. So it does factor into some of the challenges we have in Europe. I don’t think it’s our primary factor but it’s certainly -- I mean, competition is not our primary factor but it does factor into it to some degree. Operator, is there a next question?

[Operator Instructions] Okay everyone. It doesn’t appear that we have any further questions. I will just turn it back to management for any additional or closing remarks.

Okay. Thank you all very much for today's call, and we look forward to seeing you all in 90-days. Thank you.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time and thank you for your participation.