Brightcove's losses 'no surprise,' but IPO timing is

Brightcove's newly announced IPO didn't come as much of a surprise in the industry; the company has been heads down working on it for several months.

What was a bit of a surprise, however, was the S-1 form it filed with the Securities and Exchange Commission, a peek behind the wizard's curtain.

Some of the numbers for the company were pretty dramatic--it has 3,295-some customers in more than 50 countries, and its revenues this year are poised to reach $60 million, up from $43.7 million a year ago. Brightcove's growth since it launched has been steady, but not spectacular, despite the explosive growth of the online video industry.

In fact, Brightcove itself said that, not only hadn't it turned a profit since it launched its online video platform, it expects to lose money through 2012. Brightcove said it had a consolidated net loss of $17.8 million in 2010 and $9.7 million for the first half of 2011.

Because of SEC regulations relating to IPOs, Brightcove couldn't comment for this story. But competitors and industry analysts said the filing revealed a lot about a company that has pioneered the OVP category.

Ed Barton, director of Digital Media Strategies for reseach firm Strategy Analytics, told FierceOnlineVideo that Brightcove's sales were less than he would have thought, especially in the context of their own estimation of the size of the online video addressable market, which it said was $2.3 billion in 2011, and forecast at $5.8 billion in 2015.

Plus, he said, he was concerned that the company's strong revenue growth has yet to address ongoing operating losses.

"Brightcove would justifiably insist that it has to invest in order to stay ahead of a fast moving market--I assume the last couple of years of investment have been for the App Cloud initiative--but investors will need reassurance past constant promises of 'jam tomorrow,'” he said.

It also raises the question, he said, of why go to the market now before the company has a more reassuring story for the investment community?

"One wonders why raise money now rather than wait a couple of years when the issues they have to make promises about now would, hopefully, be satisfactorily resolved and the outlook would be more optimistic," said Barton.

For competitors, Brightcove's IPO filing revealed numbers they'd only guessed at before.

"The filing allowed us to confirm what we already thought," Ooyala CEO Jay Fulcher told FierceOnlineVideo. "We've been growing faster than the competition and we believe we have a stronger balance sheet. And, we think that helps to establish us as a premium provider."

Fulcher said one of the advantages he believes Ooyala has is that it was a late entry into the OVP market.

"The market has really come alive in the past three to four years," he said. "During the early years, the market really didn't have that much to give. But you have to give Brightcove credit, they really defined this segment."

Peter Csathy, CEO of Sorenson Media, said that early push in the space likely cost Brightcove a lot of money, and the company's global expansion has pushed its expenses higher as well.

"Brightcove has been in a ‘land grab mode' for a long time," Csathy told FierceOnlineVideo. "Part of that, of course, means you have to invest a lot now for long-term opportunity. Inside the industry, we knew Brightcove wasn't profitable, but the extent of its losses are a little surprising.

"From an investor standpoint, who's going to be willing to pick up the tab?"

Brightcove has invested heavily in its own infrastructure, and, as the first movers in the entertainment-based video platform space, it's had some expensive lessons that "everyone else has benefited from," said Csathy.

"It's a bold move to (open their books) right now," said Csathy. "Because we all get to see that they generate significantly lower revenues than many people believed and had higher losses."

Margins in the pure OVP space, he said, are very small and "ultimately products and solutions tend to become commodities."

SA's Barton agreed.

"This is looking to me increasingly like a space in which low margins are being eroded by an ongoing need for heavy investment in product and service development and a relatively high level of fixed cost for every new customer they bring on board," he said. "Unless there is a defensible, significant innovation which only the newer entrants can take advantage of I think the priority for players in OVP should be to scale up customer numbers and video stream volumes as quickly as possible, and that takes time."

But Csathy said he feels Brightcove's aggressive expansion around the globe may also be costing it a great deal, and increasing its cash burn.

"Brightcove has populated the globe with sales teams," he said. "That creates a lot of expenses, significant overhead. Sixty million dollars in revenues for that kind of investment is not that big."

Brightcove's global revenue mix has grown. In 2008, revenue from the North America made up 79.7 percent of the company's total, in 2009 it was 72.4 percent, in 2010 it was 67.7 percent and, so far this year, revenues from North America are pacing at 66.2 percent.

ABI Research analyst Sam Rosen said the IPO currently could be a hard sell to investors, although "a couple of big media customer announcements" could make it more palatable to Wall Street.

"In the end, Brightcove, until it gets a lot of really big media company customers, is still in a market that's relatively small, and it has a business model that's very much in development," Rosen told FierceOnlineVideo. "If you look at Brightcove relative to Hulu or YouTube or Netflix (Nasdaq: NFLX), not only from a revenue standpoint , but from the standpoint of video delivery, it's in a middle ground that really hasn't been developed."

Even the 700 million video streams it supports each month, Rosen said, is just 2 or 3 percent of the videos streamed on the Web overall.

"It's substantial, but it's not on par with the big boys," Rosen said.

Getting those sales, he said, has cost the company a lot of money.

In 2010, he pointed out, Brightcove's $24.1 million in sales and marketing expenses were nearly double its $12.3 million in R&D costs; that spread increased during the first half of this year.

"They clearly have made a decision to invest in sales and that's a risky decision at that level," Rosen said. "If they fail to gain attention, how difficult will it be to scale that back and what does it mean to their growth potential? They clearly believe the potential is there."

For more:
- see the S-1 filing

Related articles:
Brightcove seeks $50M from IPO
Brightcove rolls out App Cloud
New video content distribution patent extends Brightcove's intellectual property portfolio
Brightcove partners with LG to grow online video distribution to connected TVs
Rumor mill: Brightcove aiming for 2011 IPO
Brightcove names new CFO as company looks to more change

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