Brightcove Stock: Operating in a Tough Situation (NASDAQ: BCOV)

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Investment thesis

Brightcove (NASDAQ: BCOV) is a company that provides video platforms for businesses to communicate internally and externally. The business has benefited from a huge tailwind during the pandemic as many businesses are forced to adopting the “work from home” model which has dramatically increased the use of video. Its stock price has also skyrocketed from $6.16 in March 2020 to $24.43 in February 2021. However, as the pandemic subsides and employees return to the office, the company has struggling to continue growing. Its stock price fell nearly 70% from $24.43 last year to $6.85 currently. Despite the steep decline, the company is still a sell in my opinion. Revenues are declining, customer retention rates are low, and it also faces stiff competition from companies like Vimeo (VMEO) and Zoom (ZM). The management team mentioned that they were trying to turn the company around, but so far nothing seems to be improving.

Chart
Data by YCharts

Introduction

Brightcove is a SaaS (subscription as a service) video company founded in 2004 by Jeremy Allaire. The company provides video technology solutions to different businesses to help them reach their audience through its platform. Its use cases include broadcast, publishing, marketing, and corporate communications. The popularity of video has skyrocketed thanks to the pandemic and video has become one of the most effective ways for people to interact with each other. Brightcove offers businesses a variety of video solutions through products such as Video Cloud, Live, and Virtual Events.

video cloud

Brightcove’s Video Cloud delivers video content to various screens used by target audiences. It is an all-in-one platform with different tools for monetization, marketing, live streaming, encoding, analytics, and more. The video cloud includes many features such as

  • Video Engagement: Allows businesses to save, sort, and search your entire video library and also includes features like editing and drag-and-drop
  • Video Analytics: Allows businesses to track analytics across devices, destinations, and geographies to better understand the interests and behaviors of their audience
  • Monetization: Help businesses monetize revenue using ad integrations and also help place ads based on video content, duration, and user behavior to target specific audiences
  • Video streaming: Stream professional content securely and in high quality by working with different CDNs

Live

Brightcove Live helps businesses host live streaming virtually. It is capable of delivering full scale live streams. It is optimized for performance and quality across multiple devices and platforms with its cloud-based architecture to ensure audiences can experience the live event smoothly. It also helps businesses combine live video with ad-supported content that allows them to monetize through the stream. It also allows businesses to post their life on social media to increase audience engagement.

Virtual events

Brightcove Virtual Events is an easy-to-use enterprise product for hosting events. It is ideal for medium-sized self-service events for businesses and brands. Use cases include sporting events, concerts, sales meetings, product launches, panel discussions, conference calls, and more. The product offers live streaming, attendee networking, interactive calls, agenda creation, virtual exhibits, sponsor engagement, zoom, team onboarding, and more.

Competition

The company faces stiff competition from companies like Vimeo and Zoom. One of the reasons Brightcove struggles to grow is due to the lack of competitive advantage and product differentiation. All its products are very standard and therefore do not give it a competitive advantage over its peers. Zoom is a company that primarily focuses on video conferencing, but it has also started offering solutions like Zoom Webinar and Zoom events that compete with Brightcove’s virtual events. They are very successful as they are able to convert their large existing customer base using these new products. Vimeo, another video company, leads Brightcove in product. It offers everything Brightcove does plus exclusive features. Vimeo attracts several top-notch customers such as Meta (FB), Shopify (SHOP), TikTok, etc. Similar to Brightcove, Vimeo’s growth has slowed as the pandemic subsides. However, it is actively looking for ways to improve its product offerings and re-accelerate its growth.

Last November, he acquired Wirewax and Wibbitz. Wirewax allows users to create interactive and immersive commerce videos, while Wibbitz allows users to create short videos online in minutes with no experience required. This gives Vimeo’s platform a strong competitive advantage as Brightcove’s platform lacks these features. Additionally, companies like Zoom and Vimeo are also bigger with much stronger cash positions. Zoom, for example, currently has $4 billion in cash. This allows them to continue to invest heavily in R&D, which strengthens their position in the market. This has resulted in the slow loss of customers from Brightcove as competitors are able to offer better products and I believe this trend will continue.

finance

The company’s finances are dire. For the first quarter of fiscal year 22, the company reported revenue of $53.4 million, down 3% from $54.8 million in the first quarter of FY21. support amounted to $51.6 million, an increase of 2% from $50.8 million a year ago. Gross margin increased from $35.6 million to $34.4 million year-over-year, with gross margin increasing from 66% to 64%. Net loss was $1.6 million, or a loss of $0.04 per diluted share, compared to net income of $5.1 million, or $0.12 per diluted share, for the first quarter of FY21. Operating cash flow and free cash flow remain negative at ($690,000) and ($5.5) million respectively. The company ended the quarter with $26.7 million in cash and $24.87 million in debt.

This represents a significant slowdown in growth and profitability. In the first quarter of fiscal year 21, the company reported revenue growth of 18% and gross margin growth of 27%, compared to a decline in revenue and gross margin of 3% this year. It also failed to post a profit with a negative net profit of ($1.6) million this year. More problem appears if we dig deeper. The company ended the quarter with 3,131 customers, up from 3,312 a year ago. While the average annual subscription revenue per premium customer (ARPU) was $96,521 in the first quarter of 2022, compared to $97,039 in 2021. The recurring dollar retention rate was 91%. This is very worrying because it means that the number of customers is decreasing while existing customers are also spending less.

The management team is trying to turn the company around and reaccelerate growth. In February, the company acquired Wicket Labs, an audience insights company that provides users with visibility into subscriber content and analytics. This acquisition aims to improve its product capabilities and give the company better pricing power. The management team also said they are focused on ARPU growth. However, the result remains disappointing with the ARPU and the turnover continues to decline this quarter.

Rob Noreck, CFO, on customer counts and ARPU during the Q3 2021 earnings call

we continue to attract stronger customers and the ability to develop our customers. So you see that growth happening on the ARPU side. Again, the number of customers is not something we have focused on. We understand that it’s critical over time to move this number in the right direction, but we’re really focused on maximizing wallet share dollars for our existing and new customers.

Evaluation

Brightcove is currently trading at a FY22 price-to-sales ratio of 1.36. As a SaaS company, the valuation is very compressed. The chart below shows that the company is trading at a significant discount to similar companies. Vimeo, the cheapest company in the bunch, trades at a 180% premium to Brightcove. However, this is largely due to its lack of growth and low profitability. The company remains unprofitable and cash flow negative in the latest quarter as revenue deteriorates. From the second chart, it is shown that the other three companies are able to post nice revenue growth despite headwinds to reopening while Brightcove failed to generate growth. Even though it trades at a significant discount to its peers, I still don’t think the company’s valuation is justified when we consider growth rates, margins, profitability and outlook.

Chart
Data by YCharts
Chart
Data by YCharts

Conclusion

Brightcove is in a very difficult situation right now. The company had a great run in 2020 thanks to the pandemic, but had lost its direction as the tailwind started to weaken. It did not provide any differentiated product to improve its competitive advantage, which resulted in a very weak moat. Companies like Vimeo and Zoom are now offering similar products with additional features that Brightcove cannot offer, and they are successfully snatching market share from Brightcove. Its financial result during the last quarter is very disappointing with revenue growth, gross profit and net profit falling. Important KPIs (key performance indicators) also indicate that the fundamentals of the company are weakening as the number of customers and ARPU decrease at the same time. Although the company’s management team is trying to turn things around, the results seem to remain very disappointing.

The company is now trading at a steep discount to its peers if we value it using a price-to-sales ratio. However, it is also very important to consider growth rates and future prospects beyond just looking at a number. The company’s finances remain very weak with decelerating revenues and weakening profitability, the company is also facing strong headwinds from reopening trends and competitors grabbing market share . The company is now in a very difficult situation and I believe the company is selling at its current price.

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