Description

Brightcove (BCOV) is a Software as a Service (SaaS) business trading well below traditional SaaS multiples.  The company, which supplies video hosting and analytics services to its customers, is a turnaround situation with strong new management team and strategy.  With a $750 million market cap and $30 million in net cash, its stock trades at an enterprise value to revenue ratio of 3.5x, well below the 6x to 10x of SaaS peers growing at mid-teens revenue growth rates with similar gross margins.  I believe the discount arises from the perception that Brightcove is not truly a SaaS business with recurring revenue from its customers over a long period of time.  It has historically served smaller businesses which can be transitory based on their own success.  The company’s dollar based net retention rate, a metric that is scrutinized in SaaS companies, dipped to 80% in the June quarter as many of the company’s small customers failed due to Covid-19 issues.  In addition to the troubles at its smaller customers, one of Brightcove’s large media customers also failed in the June quarter, adding to the pressure on this metric.  I believe that Brightcove’s 2^nd quarter retention issues were temporary, and not indicative of the company’s underlying business.  Retention was an issue that plagued many technology companies that catered to the small and medium sized business (SMB) base.  The company’s 3^rd quarter metric showed much improvement which should solidify next year with renewed focus on retention.

Brightcove sells to two customer segments, media and enterprise.  Media companies use Brightcove to broadcast their content to their subscriber bases.  Enterprise customers use Brightcove to direct video content to either their own employees or their customers, or both.  During Covid-19 with in-person events and conferences shut down, many companies decided to do virtual conferences, with Brightcove hosting the video content.  An example is the South by Southwest show, that usually draws more than 100,000 attendees, went virtual this year and chose to use Brightcove to host the video after a competitive bakeoff.  Historically Brightcove’s media customers were small and medium sized – after they grew to a certain size and technical capability, they would leave Brightcove to handle their own hosting.  Brightcove is now bidding some large media companies to take up their hosting business and let those companies focus on their core strength, which is creating content.  If a large player like a Hulu, Disney+, or HBO Max decided to go with Brightcove, this would be a watershed moment for the company and, in my opinion, would immediately create multiple expansion for the stock.  Brightcove’s enterprise customers tend to be larger and stickier than the media customers, and their proportion within the business has been increasing over time.  These enterprise customers include companies such as Ford, Adobe, and Johnson & Johnson. 

CEO Jeff Ray was hired 3 years ago with a mandate to turn around Brightcove’s business, and he implemented many changes to the business model so far.  On the product side, Brightcove was an unfocused video platform when Jeff arrived and since then he has productized various aspects of the platform to simplify presentation to the customer and to allow for upsell to the existing base.  New products include Brightcove Beacon, Brightcove Engage, and Brightcove Campaign, and all have been well received by customers and prospects.  Jeff turned over about 40% of the salesforce and put in place a new head of sales who revamped the go to market approach of the company.  He started a channel development team to build an indirect channel to expand the company’s reach in the market.  He is enacting a strategy to reduce churn with both media and enterprise customers.  This broad turnaround have been brewing under the surface for the past three years and is finally beginning to show up in the numbers.  The company beat revenue and earnings estimates the past two quarters and is poised to show accelerating revenue growth in 2021 and beyond.  In the September quarter, Brightcove disclosed a dollar based net retention rate of 101%, which while perhaps being slightly inflated by a rash of upsells in the quarter, was much better than the 80% number in the 2^nd quarter.  The company thinks that the true impact of their plan to reduce churn will be seen in mid-2021 and beyond. 

The video hosting business is a competitive one, with the most visible competitor now being Vimeo, a subsidiary of IAC/InterActiveCorp.  Vimeo has been growing at a rapid pace and IAC is considering spinning it off now into the public markets.  On the surface, it appears that Vimeo is taking share from Brightcove as it is currently growing faster.  The truth is that Vimeo and Brightcove play in different segments of the market.  This is demonstrated by the average annual subscription prices of each company.  Vimeo’s is in the $200 range, while Brightcove’s is $89,000.  Obviously Brightcove is addressing much larger customers with a broader product set than Vimeo.  Also, in cases where Brightcove and Vimeo have gone head-to-head, Brightcove has won most of that business.  A good example of this is the South by Southwest conference I mentioned earlier, where Brightcove won because its platform is much more robust than Vimeo’s.  I believe that a Vimeo spinoff would be good for Brightcove’s stock as Vimeo would likely trade above 10x sales and this would make Brightcove’s 3.5x multiple appear extremely appealing.

I believe that Brightcove will rerate in 2021 with an accelerating revenue growth profile and operating leverage leading to sharply higher margins.  I believe revenue can accelerate to 15% in 2021 versus 5.5% in 2020, and EBITDA margins can rise to 12% from 9.5% in 2020.  While the stock currently trades at 3.5x sales, I believe a more appropriate multiple to be 6x sales, which is on the low end of a SaaS peer group with similar revenue growth and gross margin profiles.  This would imply a $33.25 stock price, or about 90% upside from current levels.  If Vimeo were to go public and command a 10x revenue multiple, a similar multiple on Brightcove would imply a $55 stock price, or 210% upside from current levels.  I believe catalysts for Brightcove include continuing fundamental progress in its earnings reports and the possibility that a large media player will decide to use Brightcove for its video hosting.

Risk factors for an investment in Brightcove include renewed lockdowns due to Covid, as many of Brightcove’s customers are still SMBs.  It is also a competitive market so Brightcove needs to keep executing on the sales side.  Brightcove has benefitted from the pandemic as many events have gone virtual causing their sponsors to need its services.  If the world goes back to in-person events with no video, that could hurt the company.  Brightcove believes, and I agree, that future events are likely to be hybrids of in-person plus video, as companies have seen how they can reach many more people virtually.  As such, there will still be a robust need for Brightcove’s products.

Catalyst

Bright will rerate as revenue accelerates in 2021 and margins rapidly expand