Last week Brightcove announced Q3 2020 results after the market closed on Wednesday the 21st. A record revenue result, exceeding earlier guidance, contributed to a 10%+ rise in Brightcove’s stock price in the Thursday and Friday trading sessions.
The subsequent day, Thursday the 22nd, Brightcove revealed a rebranding (see logos below). Announced in an email with a subject ‘Video is evolving – so are we,’ Brightcove’s CEO Jeff Ray started by reminding recipients “We’ve [Brightcove] grown up right alongside the industry we helped create.”
It is precisely the idea of ‘growth’ we are interested in investigating for OTT technology market segments. Brightcove’s rebrand is an opportunistic bookend to look back at prior growth expectations, compare against actual results, and conclude with a forward-looking question to the reader: what are reasonable growth expectations for OTT technology suppliers in the current market environment?
Brightcove was founded in August 2004 as Video Marketplace Inc and would change its name to Brightcove in March of the next year. Over the next six years, Brightcove would raise more than $100 million over four rounds of private financing, leading to an IPO in February 2012. In its first day of trading on the NASDAQ, the stock would close at a price of $14.30. The stock closed at $13.90 this past Friday (2,185 trading days later). Brightcove’s stock has then rewarded long-term investors since its first day of trading (in early 2012) with a cumulative return of just better than -3% over the past almost nine years.
Over the same time frame the NASDAQ 100 (index of 100 largest non-financial companies on NASDAQ) more than quintupled, turning every dollar invested in February 2012 into more than $5.5 dollars today. This contrast against general market performance is deserving of some attention, especially when measured against the meteoric rise of OTT viewership over the same period and in consideration of Brightcove’s leading position within the market for OTT technologies.
There is a tremendous disconnect between supplier rhetoric about the growth of all manner of viewership stats within the OTT ecosystem and public financial results of the technology supplier community. We would do well as an industry to talk more about the latter and less about the former.
In its IPO prospectus, Brightcove cited several business strengths. The first bullet reads “We are the recognized online video platform market leader.” To support this assertion, management cites the then delivery of 743 million video streams a month on its platform. A level management believed in 2011 was “more video streams per month than any other professional solution.” Management has maintained this claim ever since; we possess no data point to argue against the claim.
Video streams a month on the Brightcove Video Cloud platform would grow to 1.8 billion in 2015, growth of 24% per year over the 2011 figure. That figure doubled to 3.6 billion at the end of 2019.
In terms of revenue Brightcove is three times larger today versus its IPO timing. It is also much, much more profitable (or more appropriately less unprofitable). Brightcove has reported quarterly results 35 times as a public company. This past quarter, Q3 2020, was the first time Brightcove ever reported positive GAAP operating income – ever. Contrast the recent result to the -25.4% operating margin recorded in the twelve-month period preceding the Brightcove IPO.
What accounts for the discrepancy between platform usage growth and financial profile improvement against stock performance? The objective answer is the Market’s valuation of Brightcove. Below is a chart illustrating the valuation of Brightcove (in terms of Enterprise Value) as a function of trailing twelve-month sales performance.
Shortly after its IPO Brightcove’s valuation reached the zenith of more than 10x trailing twelve-month sales. Then, shortly before the one-year anniversary of its IPO, the valuation level declined below 2x trailing twelve-month revenue. With few exceptions it has traded below the 2x level since early 2014.
Any question of ‘why’ concerning valuation matters never arrives at a definitive answer. Reasonable parties can disagree on the valuation of assets. We would like to suggest one contributing factor to this case study was the growth expectations set for the OTT technology market during the last decade were not observed in practice. As such, the valuations supported by such lofty expectations have reset to more appropriate levels. Even though the valuation levels have dissipated, the lofty expectations remain.
We encourage the reader to pay more attention to the broader statement about expectation setting than the specific case study of Brightcove. It is just a stand-in for the OTT technology supplier community. Examples abound.
Despite how much of the investor communication is devoted to rhetoric around OTT growth, investors reward technology supplier business models that translate platform usage into sustainable, profitable revenue streams.
Brightcove’s management team was always careful to avoid equating streaming volumes to future revenue. “As a reminder, video streams have not historically been a good predictor of revenue, and we do not expect them to be in the future” said former Brightcove CFO Chris Menard during the Q1 2014 earnings call.
(The above statement is worth some reflection).
At the time of its IPO in 2012, Brightcove had 3,872 customers on its cloud-based SaaS platform. At the end of the third quarter of 2020 (September 30, 2020), Brightcove announced its total customer count was 3,381, or approximately 13% lower versus December 31, 2011. The most customers Brightcove ever had on its platform was reached at the conclusion of the 2013 calendar at a count of 6,318.
For all the exhortations about the future business opportunities of OTT, consider Brightcove’s paying customer count reached its maximum level seven years in the past. Quote all the viewership figures you want around OTT but understand a business plan to sell OTT technologies is targeting the universe of companies providing the OTT service.
The decline of Brightcove’s customer count was a statement on the OTT market dynamics. It was not however representative of declining market demand for OTT technologies. This was a business choice by Brightcove’s management team to transition from a volume sales approach to focus on premium customers, which supports higher pricing levels at a more favorable margin. Since its IPO, Brightcove has grown its premium customer count by almost 75%. In the past quarter, Brightcove’s annual revenue from a premium customer was almost 50% higher than the figure at the end of the 2014 year.
The path not taken was to continue spending almost 40% of its revenue on sales and marketing spend chasing something that just did not exist at the time.
Brightcove’s go-to-market transition was a reminder that a NASDAQ listed company selling business-to-business products often must devote energies to the portion of the end-user market having resources sufficient to pay premium prices for third-party products and services. In media technology industry parlance, this evokes the timeless argument about how much of a down-market opportunity exists for certain categories of professional solutions. In the case of Brightcove, and of professional-level OTT technologies, there was (is?) not much of one.
Brightcove’s recent rebranding further amplifies the move toward premium customers. The below three, consecutive frames are excerpted from the rebranding video (and yes, those are indeed from the video).
By definition, a part is smaller than a whole. In focusing on premium customers, Brightcove limited its addressable market. This returns us to the discussion of expectation setting for market size and growth.
Brightcove’s IPO prospectus (again from early 2012) includes the following management estimate for its addressable market. “We estimate our total addressable market for online video platforms to be approximately $2.3 billion in 2011, growing to approximately $5.8 billion in 2015.”
Taking the estimate on its face, Brightcove’s management in 2011 believed the professional solution with the month monthly video streams had a market share of less than 5%. Assuming that statement set your expectation for the base case of growth from Brightcove, then you would have been disappointed by Brightcove’s 20%+ revenue CAGR (compound annual growth rate) over the next four years since it would have represented market share erosion of 5% per year. And that is after incorporating the inorganic boost from the acquisitions of Zencoder (2012) and Unicorn Media (2014).
Enthusiasm is infectious, though often unhelpful in business decision-making matters.
During CEO David Mendels last earnings call with Brightcove he admonished “we remain confident that Brightcove will return to 20% plus growth over time. I want to be clear about what is underpinning that confidence. First is the size of our market, which we believe is a large multi-billion-dollar potential opportunity for both the media and digital marketing and enterprise markets.”
The above statement was made after the first quarter of 2017, when Brightcove posted a 3.5% year-over-year revenue growth result. Below is a chart of Brightcove’s annual revenue with a highlight of the timing of its recent acquisitions.
You can always diminish achievement by introducing goals without any grounding in observable facts or historical precedent. Below is the same chart beginning in 2011 and having a second plot showing the theoretical – though admittedly desirable – 20% CAGR starting with the 2017 financial results.
Over the same ‘theoretical 20% growth’ time frame Brightcove was spending nearly a third of its annual revenue or more half its gross margin dollars on sale and marketing expenses. Despite such a considerable level of investment, Brightcove could not manage to find the theoretical 20% growth offered in the market. Or perhaps the entire premise needed revisiting.
It takes time to reset expectations.
During Brightcove’s Q1 2019 earnings call, Brightcove’s CEO Jeff Ray (recently having joined) started the call with the following expectation setter, “As you’ll recall, we’ve have identified nine distinct customer end markets that IDC estimates, totaling $1.6 billion in 2016 that will grow at a 17% CAGR to $4.2 billion by 2022. We will initially target four of these segments, including marketing and sales, as well as OTT experiences.”
To put that statement in context, Brightcove managed a revenue CAGR of 14.5% since 2011 (a tremendous result). Beginning in 2019 at a revenue level 2.5x larger, in a market eight years more mature, an expectation was being set for a market growth rate exceeding the historical profile of Brightcove.
Believing an annual market growth figure of 17% is to believe any organic revenue growth result below 17% comes at a reduction of the participant’s market share. That is the necessary mathematically symmetry. Presuming the 17% growth figure is in fact representative of Brightcove’s market segments would then equate to Brightcove having ceded 22% of its market share (before adjusting for the Ooyala acquisition) since 2017 – or, alternatively, the original expectation requires revisiting.
With the above serving as background, let us now turn to the year-to-date 2020 results of Brightcove. During the Q3 earnings call Jeff Ray described the 2020 results in the following terms.
“Brightcove had an exceptional third quarter which builds upon and exceeded our record sales results in the second quarter. The strategic decisions and investments made across every aspect of the business over the past two and a half years are all coming together and delivering the performance we’ve long known this business is capable of achieving.”
Brightcove’s revenue growth figure for the first nine months of 2020 was 4.9% versus the same nine-month period in 2019. If you adjust for the merger with Ooyala (acquired OVP assets on April 1, 2019), Brightcove declined year-over-year on an organic basis.
We find no fault in a near 5% growth rate – organic or inorganic – in this business environment. We wrote about the wisdom of the Ooyala OVP acquisition based on the difficulty of generating growth in the OTT technology market segment.
Measured, however, against a 17% growth expectation for the overall market does stimulate some questions or perhaps a revisiting of growth expectations for the market. This point is cast in stark terms by looking at the organic growth profile of the combined Brightcove and Ooyala businesses.
In 2014, around the same time Brightcove’s management team was reiterating a 20% annual growth expectation, Telstra acquired Ooyala. Ooyala’s then CEO Jay Fulcher posted an open letter to Ooyala employees, which enthusiastically outlined the rationale for the transaction and discussed the future market opportunity. “Our opportunity is enormous” said Fulcher. “The market for the technologies and services we provide is will be [sic] worth tens of billions in the next few years. To win requires a heavy investment in people, infrastructure, R&D and technology.”
Contained within Brightcove’s 2019 annual filing is a pro forma analysis, describing the revenue performance of the combined business had the acquisition occurred on January 1, 2018. Given the historical expectations for market segment expansion, what would you have anticipated for a growth result of combining two such market leaders in such a fast-growing technology segment of the market?
The chart below illustrates the result.
The reader will note the 2019 revenue level was lower than the 2018 revenue level.
One of the few positive developments from 2020 is an opportunity to revisit prior expectations. As an industry we should take a moment to have a serious reflection on growth expectations and realign sales and marketing spend accordingly.
Many would cite the acceleration of OTT viewership observed during COVID disruption. “We are confident current market trends are sustainable and that video has reached an inflection point that will continue after COVID goes away” stated Jeff Ray on the most earnings call. An acceleration of viewership may well be true.
We would remind the reader, though less discussed, it is of greater importance how the viewership transition influences media technology spending decision, both type and magnitude.
There is a strong temptation within the media technology supplier community to cite lucrative market sizes and growth figures for the consumption of interested parties. We get the rationale. If, however, you start to make operational decisions based on those market size, growth statements, or set investor expectations at those levels, it is going to end badly.
What then are reasonable growth expectations for OTT technology suppliers in the current market environment?
Press Release: Brightcove Q3 2020 Results
Press Release: Brightcove rebrands
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