BrightView Holdings, Inc. (BV) Q3 2017 Earnings Report, Transcript and Summary

Greetings, and welcome to the Bazaarvoice Third Quarter 2017 Earnings Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your hosts Ms. Linda Wells, Investor Relations Director. Thank you. You may begin.

Good afternoon, and welcome to today's conference call to discuss Bazaarvoice's financial results for the fiscal third quarter of 2017 ending January 31, 2017. I'm joined today by Gene Austin, Chief Executive Officer and Jim Offerdahl, Chief Financial Officer. Following the prepared remarks we'll have a question-and-answer session. Please note that we are simultaneously webcasting this call on our Investor Relations Web site at investors.bazaarvoice.com. The earnings release with our results for the third quarter of fiscal 2017 was issued after the market closed today. 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 executions and the 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, 2016 filed with the SEC on June 20, 2016. Additional information will also be set forth in our future quarterly reports on Form 10-Q, and annual reports on Form 10-K, and other filings that we may make with SEC. 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 and undertake no duty to release publicly any update or revisions to any forward-looking statements made during this call. Finally 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 tables, contains the calculations of these non-GAAP financial measures and a full reconciliation between each non-GAAP measure and its corresponding GAAP measure. Please note that we are unable to reconcile any forward-looking non-GAAP financial measures to their directly comparable GAAP financial measures because the information which is needed to complete a reconciliation is unavailable at this time without unreasonable effort. In particular, we cannot reliably estimate our future stock-based expense, which is dependent on our future stock price, and we expect our future stock-based expense to have a significant impact on our future GAAP financial results. With that, I'll turn the call over to Gene.

Thank you, Linda, and thank you all for joining the call today. I am pleased with the overall progress we are making to transform the business highlighted by continued improvement in retention and net bookings growth in our core business as well as 37% year-over-year revenue growth from our advertising offerings. Let me briefly review our financial results for the third quarter. Revenue of $50.5 million was up 1% year-over-year and in the range of our guidance. Adjusted EBITDA of $5.3 million was significantly better than our guidance and year to-date adjusted EBITDA of $14.4 million was up $7.6 million from the same period a year ago demonstrating the success of our focus on margin expansion. Non-GAAP EPS of $0.02 was also better than our guidance. Our GAAP loss per share for the quarter was $0.03, through three quarters it is clear that we have come a long way in both the health of our business fundamentals and the execution of our strategy. Client satisfaction and dollar churn have taken big steps forward and are the foundation for our future. Our advertising business is beginning to demonstrate stronger fundamentals, which we believe will shadow more growth ahead and we are now consistently producing positive net bookings which point to higher growth for the coming quarters in our SAAS business. Let me now turn to third quarter specifics beginning with our sales performance. North America had a good quarter closing five deals over $200,000 and the selling environment remains healthy with stable ASP’s and generally good pipelines. Europe’s bookings performance was disappointing, especially after having such a good first half start. Having recently reviewed the trends I am generally pleased with pipeline for Europe heading into Q4 and believe we will see a rebound in the fourth quarter out our team in EMEA. Europe remains an important region for our Company and we see a good market for both our core SaaS products and our emerging offerings based on our shopper data. As such we announced earlier this month that we have promoted Joe Rohrlich our former Senior Vice President of Client Success to Executive Vice President and General Manager for EMEA who will be responsible for building a comprehensive growth strategy for the countries we serve today and for further expansion. Also during the quarter following the completion of a handful of pilots we have decided to delay the launch of the our recommendations engine until the first half of fiscal 2018. While our first group of retail pilot clients saw positive test results, we need to run another set of pilots to validate the product functionality and also determine the pricing and go to market strategy. The foundation for our transformation has always been centered with our clients. And our progress in client satisfaction and dollar churn is notable this year. All of the investments we have made to enhance the customer experience and to beef up our professional services continue to pay off. Fiscal year to-date services bookings are up significantly versus a year ago and for the fourth consecutive quarter, we delivered year-over-year improvement in dollar churn. Additionally our client retention rate was it’s best in 10 quarters. Underpinning these trends is a continued improvement in our day-to-day measurement of client satisfaction as measured by our net promoter scores, which have consistently improved this year and are now positive. Lastly we have seen an increase in the number of large upsells for the first time in a long time. Combined these improvements in client health over the course of the year give us confidence to improve our forecast for dollar churn for fiscal 2017. We now expect an improvement of 400 basis points year-over-year compared to our prior expectation of 250 basis points. During the quarter, we saw strong demand for our sampling offering. Recall that we launched sampling a couple of years ago, as an add on to conversations to help brands and retailers provide samples of an offering to a community of consumers in exchange for reviews. After early tepid demand, we’ve relaunched the program as a managed service with the key difference being that Bazaarvoice manages the entire program on behalf of our customer versus providing just the software. New brand launches are vital source of revenue for our retailers and brands alike. And sampling is extremely valuable in providing the content required for a successful launch. The response to our new offering has been very strong and in Q3 alone, we booked $750,000 in managed services, while it is still early our new sampling offering seems to have met a critical need with our client base. Our advertising business grew 37% percent year-over-year, a nice increase but slightly lower than our expectations. In the third quarter, we ran over a 100 campaigns and our cancellation rate was less than 2% indicative of both our unique value proposition with our shopper data and our ability to execute effectively. The percentage of repeat clients remains good and we see a clear trend of these clients signing up for much larger campaigns than their initial buy. In aggregate these metrics continue to point to a unique digital offering and we remain focused on building a strong sustainable and growing business. As we enter the fourth quarter, demand is stronger and I believe we will see an even higher year-over-year revenue growth rate. In previous calls we have commented on gross bookings performance without BV Local, Asia Pacific sales operations and North America SMB, which were discontinued last year. Using this measure year to-date such gross bookings were up 2% year-over-year. Our overall gross bookings we’re not factoring out those two initiatives, we’ll now most likely be relatively flat for the full-year. Through three quarters, all of our main economic indicators have improved albeit, slower than expected. Our SaaS net bookings performance have improved each quarter despite a weak third quarter in Europe, with our largest net bookings quarter still remaining. Net bookings improvement have largely been attributed to our improved client health and better than expected dollar churn. Advertising started the year slow, but is building momentum in the second half. Due to these factors as well as our delay in product recommendations we are lowering our guidance for the remainder of fiscal 2017 and Jim will outline the details in a few minutes. However our progress is such, that we believe a fourth quarter is the low point in revenue growth, and that our top line performance will improve in fiscal 2018. Preliminarily, we are confident our revenue growth will be at least 3% next year. And we will exit at an even higher growth rate. Commensurately we expect to continue to increase our adjusted EBITDA dollars next year. In short, we have turned the corner on revenue growth and expect steady improvement beginning in Q1 of fiscal 2018. We will provide more formal fiscal year 2018 guidance on our next quarterly call. In summary, we are still in the early stages of our five-year plan to double the revenues of Bazaarvoice by leveraging our three core assets of CGC expertise, our growing network and our unique shopper data. Our client’s statistics have improved dramatically this year indicative of our continued investment in innovation and services in our core business. Our advertising business powered by our very valuable shopper data got off to a slow start this but the business fundamentals point to improving performance in the future. In short while there is much work to do, we are excited to see our revenue growth rates beginning next year. Thank you and I would like to turn the call over to Jim.

Thank you Gene and thank you again to everyone who joined our call. Today we're reporting results for our third quarter of fiscal 2017 ending January 31, 2017. For the third quarter, we achieved total revenue of $50.5 million, up 1% year-over-year and within our guidance range. We achieved SaaS revenue of $47.3 million, and advertising revenue of $3.2 million up 37% year-over-year, which is much improved versus our first half advertising performance as Gene indicated. We achieved positive adjusted EBITDA of $5.3 million well above our guidance range. This is better than anticipated mainly due to a favorable adjustment to our corporate bonus expense, without which we would have still been above our guidance range. Our GAAP loss per share for the quarter was $0.03. Our non-GAAP earnings per share was $0.02, better than our guidance of a loss of $0.01 to $0.03. We launched 89 clients in the second [ph] quarter, and ended the quarter with 1,456 active clients, up 5% from a year ago. Annualized SaaS revenue per average active client in the second [ph] quarter was $132,000, down slightly from recent quarters as we lost only 45 clients in Q3. We believe that most of the SMB client losses are now behind us. As a result our client retention rate improved significantly to 96.8% in Q3 our best rate in 10 quarters. Our dollar churn rate in Q3 was similar to Q2 and as Gene mentioned we have now improved our dollar churn rate year-over-year for the fourth quarter in a row. As we noted in our call last quarter, our fiscal year 2016 dollar churn rate was approximately 20%. Our investments in customer satisfaction and retention are paying off. And based on our dollar churn results for the first three quarters of this fiscal year, we now expect our annual dollar churn rate for fiscal year 2017 to improve by at least 400 basis points year-over-year compared to our prior expectation of 250 basis points. Note that we plan to disclose our full fiscal year 2017 dollar churn rate on our Q4 call. Moving on to our P&L, gross margins for the third quarter was 68.1%, down 50 basis points from the same period last year. We continue to expect gross margin to be in the mid to upper 60s for fiscal 2017. Sales and marketing expenses for the third quarter were $15.3 million or 30.3% of revenue as compared to $15.2 million or 30.3% in the same period last year, as we have continued to tightly manage such expenses. For the full fiscal year we expect sales and marketing expenses to be 30% to 31% of revenue or 200 basis points to 300 basis points better than fiscal year of 2016. R&D expenses for the third quarter were $8.5 million, representing 16.9% of revenue, as compared to $9.2 million or 18.3% in the same period last year. For the full fiscal year we expect R&D expenses to be 50 basis points to 100 basis points better in fiscal year 2016. G&A expenses for the third quarter were $5.3 million or 10.4%, up slightly from the same period last year. For the full-year, we expect G&A expenses to be similar to last year as a percent of revenue. We ended the quarter with 777 employees, down 5% from a year ago, and we achieved annualized revenue per average employee of $260,000, up 8% from the same period last year as we have continued to manage our headcount across all functions. Moving on to the balance sheet and cash flow, we ended Q3 with DSOs of 94. Note that our DSOs typically increased sequentially in Q3 of each year as we have seasonally higher advertising billings, which are booked on a gross basis. In addition in Q3 our percentage mix of annual and semiannual billings was the highest looking back over three years. Despite the higher DSO’s our receivables are of high quality, as our percent over 90 is less than 5% also the best it has been looking back over three years. And our bad debt expense in our P&L has been minimal over the last seven quarters. Our deferred revenue balance was $73.7 million at the end of Q3, compared to $63.2 million at the end of Q3 last year, and $65.1 million at the end of Q2, also reflecting our strong semi-annual and annual billings mix. We ended the quarter, with $83.5 million in cash, cash equivalents, and short-term investments. We have $37 million in debt outstanding, $20 million less than a year ago. Our cash flow from operations was a negative $1.1 million in Q3. CapEx was $2.1 million, most of which was capitalization of developed software as we continue our product innovation. Free cash flow was a negative $3.2 million for Q3. Based on our historical collections performance relative to prior quarter billings we expect strong operating and free cash flow in Q4 and also continue to expect to be free cash flow positive for the full fiscal year 2017. Now I'd like to finish with our financial outlook. Weak Q3 bookings performance in Europe, our decision to delay general availability of product recommendations and slightly lower than expected advertising revenue in Q3 is impacting our near-term revenue outlook. We now anticipate advertising revenue growth for the full fiscal year 2017 to be the same as our original fiscal year 2017 guide of 20% to 30%. As a result for the fourth quarter of fiscal 2017, we expect total revenue to be in the range of $49.8 million to $50.6 million. This is down slightly from Q4 of last year but recall that approximately $1.6 million of revenue in Q4 last year related to out of period revenue and higher than typical revenue coming off hold for non-payment or non-renewal. We expect adjusted EBITDA to be in the range of $1.5 million to $2.3 million. Non-GAAP loss per share is expected to be in the range of $0.02 to $0.04 based on 83.7 million weighted average shares outstanding. For the full fiscal year 2017 we’re commensurately lowering our revenue guidance to be in the range of $200.8 million to $201.6 million or a 1% year-over-year growth at the midpoint. And note that our original revenue guidance for FY17 was $201 million to $203 million including advertising to grow in the 20% to 30% range. We are pleased that despite having to absorb the approximate $1.5 million impact from foreign exchange headwinds we've incurred since then we expect to be within or very near the original range of both those metrics. We are maintaining the midpoint of our guidance for adjusted EBITDA and expect it to be in the range of $15.9 million to $16.7 million an improvement at the midpoint of over $7 million from fiscal 2016. Non-GAAP EPS per share is expected to be in the range of $0.00 to $0.02 based on 83 million weighted average shares outstanding. In summary, our financial foundations firm, our core SaaS businesses strengthening, we have strategic assets that we are beginning to monetize and we’re excited that our revenue growth rates should increase in fiscal 2018. I would like to remind everyone that we will be presenting at the Morgan Stanley conference in San Francisco tomorrow, with that operator please turn the call over for questions.

Thank you [Operator Instructions] Our first question is coming from the line of Kevin Liu with B. Riley. Please proceed with your question.

Hi good afternoon. Just wanted to drill down into kind of the bookings performance in Europe a little bit more. Could you just talk a little bit about what you felt the issues were within the quarter in terms of why it dropped off relative to the first half.

Yeah I think Kevin there were two real factors, we got behind in our hiring, on sales headcount. We had some attrition in the first half of the year and our ability to fill those positions, in a timely fashion did not go quite as planned. I think we're rectifying that as we speak. And with a pretty solid first half, out of the European team we entered Q3 with less mature pipeline meaning our pipeline from a number of standpoint looks good but they needed – the deals needed more time to ripen if you will. I am expecting, a strong rebound in Q4 because I generally feel like pipelines in Europe are good I also feel like pipelines in North America in the SaaS business are good. So you know I expect Q4 to be our strongest bookings quarter for sure this year.

And within advertising, the growth rates certainly looked fine for the third quarter but you mentioned it was below internal expectations. I guess how much more had you anticipated within the quarter and what do you feel it is kind of required here to get that business performing more consistently with what you expect.

Yeah I mean, let me open and then Jim can pile on if you want. Look we clearly have had a fluctuating business in our advertising business from a growth rate standpoint. Part of that is because our first party data, we've actually been really selling our first party data for maybe three, maybe four quarters at most. And so we're still understanding, demand understanding the ability for that business to go. The feedback from our clients continues to give me a lot of encouragement, but we are still as a Company really trying to understand how this business is going to evolve and what the growth rates can be. We are generally very encouraged by it but it has been no question challenge for us to forecast in 2017. The advertising business, is down we were expecting, when we had to call in 90 days ago. We felt like advertising was off to a strong start in Q3 and we thought it might perform at an even higher level than our guide. And since then, it kind of came back a little bit from what we were expecting. But 37% is still a growth rate that we haven't had in that business. Certainly in FY17 or FY16 and we do think the pipeline supports an even higher growth rate in Q4 so. Our job is to make sure we're in a position to do a good job of measuring that business and continue to forecast it better.

And one last one. Jim you talked a little bit about kind of the annual and semi-annual billings kind of driving the deferreds and ARs higher, so we’re just curious as to whether it's the customers that are trying to change payment terms, whether you guys are pushing for more, kind of upfront payment, any sort of color that would be helpful?

Yeah it's actually a factor of a couple things, typically in the second half of the year our larger deals renew and a lot of those are on annual type billings, which helps. And that typically does go up in Q3, but it went up more than prior years, we do have our sales force pushing it a bit, not a lot but a bit more. We do have a little space in place for our sales force for multi-year contracts and upfront payments. So and that's worked, our average term life has gotten longer and as exemplified in Q3 the mix of semi and annual billings was higher than typical and higher than it has been in a number of years.

Alright, thanks for taking the questions.

Thank you our next question of pricing on line Mike Latimore with Northland Capital. Please proceed with your questions.

Hey thank you very much. Just wanted to clarify, you think the advertising revenue growth rate will be faster in the fourth quarter, just wanted to clarify that.

Yes, based on the guide for a 20% to 30% for the year, and based on the total guide for revenue, Mike then just it – just match the points to a higher growth rate than 37% in Q4.

Okay got it and then in terms of just the sales people and the advertising group are they all in place now and then I guess secondly any success getting some more of the holding company’s onboard rate card.

Mike, the sales force is fully staffed and I would say the vast majority of our sales people in advertising are what we would consider productive meaning they have been with the company long enough to be contributing meaningful sales. Our progress, on rate cards as the holding companies continues, we still have more to go but I think we have now signed two holding companies of a large size. So I think we've made some good progress there.

And this Jim let me add a little bit to that. Our sales productivity year-over-year for ad or ad reps is up, we still think we got some room to grow there, we'd like it to be higher but it's up year-over-year, which is a good sign.

And just typically what percent of bookings would you – of a year booking would you expect in the fourth quarter.

Yeah, I don't think we’ve disclosed that from a percentage standpoint, but it is typically one of our strongest quarters of the year. The forecast that I see right now wouldn't indicate how Q4 is going to be. Nicely higher than Q3.

That would translate into higher, highest net bookings quarter as well since churn continues to do well.

And I think it's important to realize when we give 2018 guidance that most, well not most but 30% to 40% of the net bookings attainment in 2017 will be this quarter. And so we're expecting a continued good churn environment with improved sales performance , which should drive higher net bookings, though our guide of at least 3% is based on, still making sure Q4 performs as expected.

Thank you.

Thank you. Our next question is coming from the line of Scott Berg with Needham & Company. Please proceed with our question.

Hi, great this is actually Peter Levine for Scott. Just a couple of quick ones, here, I guess dig a little deeper on the product recommendations on the delay, I guess what did you see internally from the customers that you had on the demo, that would force you to push it out. And does that affect you releasing the product in Europe because I believe last quarter, you said that you would release that I believe in the second half of 2017 as well.

The answer to the second question first is, we probably will line up the releases of U.S. and Europe, more closer together with this delay because we were already factoring in a second half will roll out, first half of 2018 will roll out for Europe. Though I don't think at this point it impacts Europe. The look simply put recommendations, has proven to be a very strong offering. When our clients, for our clients for their new visitors. And new visitor is being defined as people that made, a brand a retailer hasn’t been in 30 days and so that's been a significant statistic and win and for us. Most of these clients already have, a recommendation to a product but it's also designed around just what's taking place inside their website. We bring the ability to recommend an offering for people that are coming from various different websites, it's very different but when we talk to our clients, they're trying to reconcile the difference between what they currently had and what we offer. And so we want to test it a little further, test some other metrics, try other types of retailers. And we want to make sure we understand what's the best way to approach a market that has incumbent but albeit they're doing very different thing. And so we just want to be – we just want to be diligent in the way we go but the other thing I was saying is that the bigger picture for us is that we believe the data that we have is really an opportunity to be a unique – to provide unique solutions in personalization. And personalization, recommendations is just one aspect of personalization but we think our data gives retailers the opportunity to personalize the shopping experience in a way that they've not been able to do because we are providing them insights into people that are in the market for branded product at that moment in time. So recommendations is the first foray into this personalization initiative but at this point we want to make sure that it’s on the mark and that it's the right product for our retailers going forward and that it fits it fits well into their current environment.

And then just a little color, more color on the bookings in the quarter, can you clearly give a percentage or a breakdown of deal size and in terms of new logos versus upsells and kind of how you saw that in EMEA and the SaaS business entering the ad business as well.

You know let me start there, we typically have like a almost a 50/50 mix between bookings of new business and upsells, sometimes 40/60 new business to upsells, which we think is healthy. And SaaS business from an ad standpoint we’ve as Gene noted on the call we've got really good rates of repeat buyers and when they repeat it typically the campaign sizes go up.

To comment a little bit more on bookings in general for you is, we made a comment in the call that bookings this year are going to be relatively flat. We have seen – remember that the year before we actually, we’ll obviously think flat for this year is actually improvement over the prior year and so we are seeing a nice improvement in overall sales productivity. Deal sizes are stable pipeline is in good shape as well. And so I think, as we sit there looking at 2018. I think the Company has a great opportunity to grow bookings next year. We thought we might get there this year, we think we are going to fall a little short of that, but the trends in our bookings performance on the SaaS side are definitely turning, in almost every category that we measure.

And just another point I'd like to add there, remember last year fiscal 2016 bookings, 15% to 20% of that bookings was BV Local, APAC and SMB where we discontinued sales ops for those. So without those, our bookings year-over-year grew. So that's why we think going into 2018, we believe we can continue to grow our bookings.

Great appreciate the color thank you.

Thank you, our next question is coming from the line of Stephen Ju with Credit Suisse. Please proceed with your question.

Hi guys it's Chris on for Stephen, curious about the with the delay in the product recommendations product, should we expect it to still launch at the feature set or should we expect some type of kind of sponsored product listing to be incorporated into it. And then how much does that product alone in whatever capacity it's going to launch-in factor into the 3% for next year.

Answering the second question first, not much I think it'll be minimal for our revenue growth rate. I think that the – as far as adding additional functionality I think the running additional test is getting more client feedback absolutely, it would open the door for additional functionality. But I don't I can't tell you exactly what that might be.

Okay and then one follow up on the sampling product, you've kind of brought that in-house and now you are running it as a managed service, what does the incremental cost burden look like for you when you bring a product inside and run it versus just selling the service the software.

Yeah, Stephen this is Jim, I think you can look at it like other typical services offerings where we expect to make a typical margin on services. And so gross margins are less on services but we believe the net margin is similar because there's no really R&D needed to support it. And so just like any other typical services offering our business. And just another point, our services revenue as a percent of our grand total revenue is immaterial at this points so, we have lot of room to grow there if we choose to.

Okay thank you.

Thank you, our next question is coming from the line Ilya Grozovsky with National Securities. Please proceed with your question.

Thanks just wanted to get an update, on you guys we're working on getting the shopping data rights from a lot of your clients and that was a process you're going through over the past several quarters. Can you just update us on that, has everybody signed onto you getting that information.

We continue to all of our new client contracts contain the rights to – their data out from a shopper data standpoint, which we call EDR Enhanced Data Right, that's our internal term for it. And very few clients turn that down, each quarter. So we're making good progress with sign-ups I'm also very pleasantly – but I'm really pleased with what's going on in Europe, where we have made progress both good progress in the U.K. and even in Europe in talking about Europe. So I think that's also bodes well as we look to 2018 for moving some of our personalization and shopper advertising solutions over to Europe. The shopper data account for the quarter was well over 200 million meaning that's how many shoppers that we had on our network that we could identify and could identify their shopping behavior. That number is going to come down it’s inflated because of the holiday season but it is still very high number and more than enough for our solutions to work extremely well.

Okay, thanks.

Thank you [Operator Instructions] It appears that we have no additional questions at this time, so I would like to pass the floor back over to Gene Austin for any additional concluding comments.

I just want to thank everybody for attending the call. I know many of you are going to be with us next week at our Client Conference our Client Summit, which we’re excited to meet you all and have further conversation. And we will be out tomorrow at the Morgan Stanley Conference. Until next quarter, thank you very much.

Ladies and gentlemen this does conclude today’s teleconference, again we thank you for your participation and you may disconnect your lines at this time.