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Brightcove (NASDAQ:BCOV)
Q2 2020 Earnings Call
Jul 22, 2020, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Greetings. Welcome to the Brightcove second-quarter 2020 earnings call. [Operator instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Brian Denyeau, you may begin.

Brian Denyeau -- Senior Vice President, International Sales

Good afternoon, and welcome to Brightcove's second-quarter 2020 earnings call. Today, we'll discuss the results announced in our press release issued after market close. With me on the call are Jeff Ray, Brightcove's chief executive officer; and Rob Noreck, Brightcove's chief financial officer. During the call, we will make statements related to our business that may be considered forward-looking and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements concerning our financial guidance for the third fiscal quarter of 2020 and the full-year 2020, expected profitability and positive free cash flow, our position to execute our go-to-market and growth strategy, our ability to expand our leadership position, our ability to maintain and upsell existing customers, as well as our ability to acquire new customers.

Forward-looking statements may often be identified with the words, such as we expect, we anticipate, upcoming or similar indications of future expectations. These statements reflect our views only as of today and should not be reflected upon as representing our views of any subsequent date. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations, including the effect of the COVID-19 pandemic on our business operations, as well as the impact on general economic and financial market conditions. For a discussion of the risks and other important factors that could affect our actual results, please refer to those contained in our most recently filed annual report on Form 10-K and as updated by our other SEC filings.

Also during the course of today's call, we will refer to certain non-GAAP financial measures. There's a reconciliation schedule showing GAAP versus non-GAAP results currently available on our press release issued after market closed today, which can be found on our website at www.brightcove.com. In terms of the agenda for today's call, Jeff will provide a summary review of our financial results and update on our operations and a review of our strategy. Rob will finish additional details regarding our second-quarter 2020 results, as well as our outlook for the third quarter and full-year 2020.

With that, let me turn the call over to Jeff.

Jeff Ray -- Chief Executive Officer

Thanks, Brian, and thanks to all of you for joining us today. Before I review the quarter and update you on the business, I would like to begin by acknowledging the overdue conversation about racial injustice taking place across the country. I have been inspired by the actions our employees have taken to make Brightcove a better, more inclusive company. There is more that we can do, and we are committed to listening and making real changes in our business.

Turning to our second-quarter performance, I am pleased to tell you that Brightcove delivered very strong results on both the top and bottom line. Our performance was driven by good sales execution around the world, the strength of our product portfolio, and the increasingly strategic role of video in the enterprise. I'm particularly proud of everyone at Brightcove for their great work to deliver these results in the midst of the global COVID-19 pandemic in a challenging economic environment while working from home. We believe our second-quarter results are the strongest indication yet that our strategic plan to deliver breakout consistently profitable growth is working.

As Rob will detail later, we are confident that we have enough momentum and visibility into our business for the remainder of the year to again provide full-year guidance. Turning to our financial results briefly for the second quarter, we delivered second-quarter revenue of 47.9 million, up 1% year over year, and well ahead of our guidance. Adjusted EBITDA was 4.2 million, which was up significantly from a loss of 130,000 in the second quarter of 2019 and exceeded the top end of our guidance by 3.2 million. From a new sales perspective, we had the best quarter in our history.

This success was broad-based, including our strongest quarter ever in North America, the best sales quarter in EMEA in years, and good demand in both Asia Pacific and Japan. We are pleased with the momentum we're seeing in both new customer wins, which saw a notable improvement from recent quarter, as well as improved performance in selling back into our installed base. As discussed in recent earnings calls, the transformation of our sales team under the leadership of our chief revenue officer, Rick Hanson, is complete. And our team is performing well.

The combination of our strengthened regional leadership, the great new talent we have added to our sales team and the comprehensive sales training and certification process each rep goes through is paying off. Our strategy to have dedicated teams that focus on strategic accounts, signing new customers, and expanding video adoption within our installed base has also been a success. The result is a more accountable selling process that gives our reps everything they need to be as successful as possible. I am thrilled with the progress we've made with our sales organization and believe they are in a good position to build upon this momentum going forward.

The success of our sales team is in partnership with our marketing organization, which is delivering a much-improved demand generation program. The changes in how people work due to COVID has presented us with unique opportunities to reimagine how we engage with current and prospective customers. Our team has done an excellent job in quickly identifying and engaging those opportunities, and it is driving deeper, more strategic discussions. A great example was the highly successful launch of PLAY TV.

Built on Brightcove Beacon and brought to market in less than 60 days, PLAY TV is the industry's resource for all topics video. It's been viewed by thousands in more than 70 countries, and customers are using it to make decisions about their video strategy. For example, we had 1 large global pharmaceutical company that watched 70 different videos on PLAY TV as part of their diligence process before signing a deal with us in the quarter. That type of engagement is unheard of and not something that can be delivered through traditional channels.

PLAY TV is also a great example for how to bring an OTT service live in a short period of time with built-in industry best practices. Another example of our responsiveness to customer needs was the recent launch of Brightcove Virtual Event Experiences. This offering quickly and easily allows customers to deliver high-quality virtual events. We have made it easier than ever for customers to deliver high quality, engaging video content around the world while remaining in control of branding and user experience, and demonstrating real business value to its sponsors.

The final part of our go-to-market strategy is building out a channel program. Just recently, we announced the expansion of the Brightcove Global Partner Program, opening Brightcove's portfolio to a broad ecosystem of channel partners, developers, and agencies who reach enterprise and media organizations. One of the key new programs is the master license partner, who can, for the first time, deliver our video technology and solutions as a managed service. We believe this is an exciting way to make our technology available to a broader set of customers and puts the full Brightcove platform within reach of all sized clients.

From a product perspective, we're seeing adoption across our product portfolio, whether it is providing a compelling OTT experience, capturing the attention of current or prospective customers or engaging with and supporting your employees, video is how business gets done today. We have the world's most scalable and performant platform that can handle all types of use cases from the simple and fast to the large and highly complex. For example, virtual and live events are seeing tremendous growth. While the limitation of physical events due to COVID has been a catalyst for companies to look at virtual events, forward-thinking companies know the future of events involves a hybrid model.

Physical events will have to have a virtual experience to reach attendees that are unable to attend in person. Hybrid events increased ROI and expand reach. It's no longer an either/or. It's both.

Companies have seen the vast opportunities ahead with virtual events, and there is no going back. Some of the recent events powered by Brightcove include large customer conferences, like ServiceNow Knowledge 2020, DocuSign MomentumLive, and Talkdesk Opentalk 2020 virtual. The NAB Show Express, which has been accessed by over 40,000 industry professionals since launch. A great example of the unique value of virtual events was FreightWaves LIVE @HOME, a three-day event with 85 video presentations and 200 commercials viewed by 90,000 unique visitors who watched 250,000 video streamed sessions and 5 million minutes of content.

We are also establishing Brightcove as the go-to vendor to power live virtual concerts and entertainment events, including the Dropkick Murphys' Streaming Outta Fenway concert, joined by Bruce Springsteen, which has had more than 9 million live and on-demand views through June. The Metropolitan Operas At-Home Gala where more than 750,000 viewers watched live performances by more than 40 artists from around the world. The Tanglewood 2020 Online Festival, which will continue the Boston Symphony Orchestra's tradition of live summer classical music concerts that dates back to 1937. And Willie Nelson's 47th annual 4th of July Picnic, which was live-streamed across multiple websites and available on SiriusXM's Willie's Roadhouse channel.

In addition to the strength of our core platform, we're seeing strong interest in the new innovation we've recently brought to market. Brightcove Beacon has quickly established itself as the best OTT offering and Brightcove as the leader in this market. We signed a number of deals in the quarter. And we are also beginning to see larger deal sizes.

We're seeing a clear shift in the use of video in the enterprise as organizations are now looking for media grade solutions for internal communication, virtual and live events, marketing and sales efforts and training. Brightcove's Q2 Video Index will show enterprise video increased by 93% in the second quarter compared to a year ago and 132% for the first half of the year. One example of this shift is with enterprise organizations who, due to COVID, suddenly have a remote and distributed workforce, and now want to engage directly with employees and partners through a corporate TV-like experience. Brightcove Beacon provides this reach in a fast, flexible, media grade quality experience.

Content is available on a broad set of devices in apps, web and smart TV. For example, we had a large global pharmaceutical customer choose Brightcove Beacon to directly engage with employees and customers. Demonstrating OTT capabilities are relevant across all our core market segments. Internal communications, digital marketing, and business continuity are also top-of-mind priorities for most enterprises, and having purpose-built applications and packages for these use cases is getting Brightcove involved in a growing number of deals.

Brightcove Engage, Campaign, and Continuum are driving more strategic conversations with customers and are an important part of our product portfolio. I'd now like to highlight a few of our key customer wins from the quarter. Masterclass is a virtual education platform for viewers to learn from the world's best-known figures and celebrities in music, film, culinary arts, photography, and more. In early March, the company launched on all of the main OTT platforms and celebrated its fifth birthday as a company.

Brightcove is part of the backbone of the master class subscriber experience powering the video-on-demand content as well as being an outlet for their recently launched live sessions. Tastytrade is the fastest-growing financial network in the world. Tastytrade currently produces eight hours of live original programming each weekday to provide financial information, investment strategies, and entertainment related to options trading and the stock market. Delivered through Brightcove Live.

Tastytrade signed a multiyear contract with Brightcove this past quarter. Arthur J. Gallagher and Company is a U.S.-based global insurance brokerage and risk management services firm. In mid-March, with the COVID pandemic situation developing, the company asked its global employee base to work from home.

At this point, it also pivoted to video communications to keep employees abreast of company updates as they unfold it, to boost morale via updates on company and sales pursuits and ensure compliance and safety with newly implemented processes. Security is critical to the company, and we are grateful they recognize our ability to securely deliver video. The Real Hip-Hop Network is the first 24/7 hip-hop streaming service. Dedicated to real hip-hop lifestyle and culture.

The Real Hip-Hop Network was founded with the quest to preserve real hip-hop and elevate every aspect of hip-hop culture. They selected Brightcove and Brightcove Beacon to relaunch its OTT apps on iOS, web, Android, Fire, Roku, and Apple devices. They chose us due to the fact that we are the most reliable and scalable solution out there. I'd like to finish by discussing our expectations for the second half of the year.

We continue to see good growth in the number and quality of inbound inquiries from prospective customers and our installed base, which is a positive sign of both market demand and how our investments in demand generation and sales enablement are paying off. An important area of focus will be on virtual events, which are becoming the new standard for enterprises. We see significant growth in this area, and we intend to capitalize on that opportunity going forward. While we're pleased with our second-quarter performance and position heading into the second half of the year, we continue to expect the uncertain economic situation will present some near-term challenges in closing new business.

Overall, I would say that business conditions have improved since April, but they are not yet back to normal. One area where we have been pleasantly surprised is how customers in certain markets, like live sports, have fared during the pandemic. Our live sports customers have performed better than we expected and have shown great resilience in finding ways to be successful without its traditional live events. In terms of renewals, we continue to make progress on building a more predictable renewals process.

This includes proactively managing customers, we believe, may be a higher risk of churning in the future. Our focus in the second half is to make further improvement and get retention rates back to at least our historical average. In the second half of the year, we will remain focused on our three priorities, which are guiding our decision-making and leading to good results. First, the safety and well-being of our employees, their families and our customers; next, protecting the cash flow of the business; and finally, maintaining our ability to execute against our long-term growth strategy.

We had a very strong cash flow quarter in the second quarter, and we're confident we will generate positive free cash flow for the year. We are making good progress on driving productivity improvements across the entire business and reallocating existing spending toward higher ROI projects. As the video market continues to rapidly evolve, we will continue to make investments that strengthen our existing solutions and identify new opportunities for Brightcove to create more value for our customers. Before I turn it over to Rob, I want to share a change in our executive leadership team.

Charles Chu, chief product officer, is leaving Brightcove, and I'm excited to announce that Namita Dhallan has been appointed Brightcove's chief product officer. Namita will drive the next chapter of Brightcove's product innovation, managing the product management, engineering, and operations functions. Namita has previously advised Brightcove's global services team and led the successful Ooyala integration program. Prior to her work with Brightcove, Namita was senior vice president, chief product officer at Ellucian, where she led engineering, product management, and CloudOps and DevOps.

She was previously EVP product strategy and engineering at Deltek. Prior to that, Namita held several positions in product management at JDA. I partnered closely with Namita in previous roles and know she will bring world-class leadership, deep market insight and relentless focus on innovation to Brightcove's product organization. To summarize, Brightcove delivered impressive second-quarter results.

We believe we are at the early stages of mass adoption of video in the enterprise and that COVID is video's evolutionary moment. The investments we made to our product and in our go-to-market teams are paying off and position Brightcove well to be one of the winners in this market. We're focused on building upon our success in the second quarter, so we can deliver the full promise of video to our customers and generate consistent profitable breakout growth to our shareholders over time. With that, let me turn the call over to Rob to walk you through the numbers.

Rob?

Rob Noreck -- Chief Financial Officer

Thank you, Jeff, and good afternoon everyone. I will begin with a detailed review of our second quarter, and then I will finish with our outlook for the third quarter and the full-year 2020. Total revenue in the second quarter was $47.9 million, which was well above our guidance range, due primarily to better-than-expected bookings early in the quarter. Breaking revenue down further, subscription and support revenue was $45.6 million, and professional services revenue was $2.3 million.

12-month backlog, which we define as the aggregate amount of committed subscription revenue related to future performance obligations in the next 12 months, was 108.8 million. This represents a 1% year-over-year increase. On a geographic basis, we generated 54% of our revenue in North America during the quarter and 46% internationally. Breaking down international revenue a little more, Europe generated 18% of our revenue, and Japan and Asia-Pacific generated 28% of our revenue during the quarter.

Let me now turn to the supplemental metrics we share on a quarterly basis. Our recurring dollar retention rate in the second quarter was 80.1%, which is below our target range of low to mid-90. There were a couple of factors impacting retention rate in the quarter. First, we had a Japanese customer who acquired a competitive OVP in the market and brought the majority of their traffic in-house.

Second, as we anniversary the Ooyala transaction, there were several legacy customers who are still running on Ooyala's platform that did not renew. We have now migrated nearly all of the Ooyala installed base and don't anticipate further material impacts to retention rate. Generating an improved consistent retention rate is a core focus for us, and we believe we have the systems and processes in place to be successful. Our customer count at the end of the second quarter was 3,423, of which 2,279 were classified as premium customers.

Looking at our ARPU within our premium customer base, our annualized revenue per premium customer was $87,200, which was up 4% year over year and excludes our entry-level pricing for starter customers, which averaged $4,400 in annualized revenue. Looking at our results on a GAAP basis, our gross profit was $28 million, operating loss was $1.2 million and loss per share was $0.03 for the quarter. Turning to our non-GAAP results, our non-GAAP gross profit in the second quarter was $28.6 million, compared to $26.8 million in the year-ago period, and represented a gross margin of 60%. Subscription and support revenue represented 95% of our total revenue and generated a 62% gross margin in the quarter, compared to a 58% gross margin in the second quarter of 2019.

Non-GAAP income from operations was $3.1 million in the second quarter, compared to a non-GAAP loss from operations of $1.5 million in the second quarter of 2019. Adjusted EBITDA was $4.2 million in the second quarter, compared to a negative $130,000 in the year-ago period and above the high end of our guidance range for the quarter. We are pleased with the improvements in profitability, which reflects the impact on our steps to improve productivity and reallocate existing spend toward our growth initiatives. On a year-over-year basis, we also benefited from our play user conference being virtual this year.

Non-GAAP net income per share was $0.07 based on 40 million weighted average shares outstanding. This compares to a net loss per share of $0.04 on 38 million weighted average shares outstanding in the year-ago period. Turning to the balance sheet and cash flow, we ended the quarter with cash and cash equivalents of $27.8 million. During the quarter, we repaid $5 million of the $10 million we drew down on our revolving credit facility last quarter.

During the second quarter, we generated $2.9 million in cash flow from operations and free cash flow was 516,000, after taking into account $2.3 million in capital expenditures and capitalized internal-use software. We are pleased with our cash flow performance in the quarter, which reflects our improved profitability. I would now like to finish by providing an updated outlook for the third quarter and the full-year 2020. As Jeff mentioned, we are pleased with the trends we are seeing in the business and the level of interest and sales activity in our pipeline.

We believe this is a positive indicator for future growth. However, we are still facing an uncertain economic environment, and there remains a level of uncertainty on the timing of when deals will close. With that in mind, based on the strength of our second-quarter performance from current trends for the second half of the year, we are comfortable providing both third quarter and full-year 2020 guidance. For the third quarter, we are targeting revenue of $46 million to $47 million, including approximately $2.5 million of professional services revenue.

From a profitability perspective, we expect non-GAAP operating income to be a loss of $500,000 to breakeven and adjusted EBITDA to be between $800,000 and $1.3 million. Non-GAAP net income per share is expected to be in the range of a loss of $0.01 to $0.02 based on 39.6 million weighted average shares outstanding. For the full year, we are targeting revenue of $186 million to $188 million, including approximately $9.4 million of professional services revenue. From a profitability perspective, we expect a non-GAAP operating income of $5.3 million to $6.3 million and adjusted EBITDA to be in between $10 million and $11 million.

Non-GAAP net income per share is expected to be in the range of $0.08 to $0.10 based on 40.2 million weighted average shares outstanding. Our adjusted EBITDA guidance reflects the third consecutive year of annual growth. For the full year, we are now targeting free cash flow of $1 million to $3 million. To summarize, our second-quarter results demonstrated the positive impact on investments in product and our go-to-market team are having on the business.

Our product leadership in a dynamic market puts Brightcove in a good position to deliver improved top and bottom-line performance over time. We remain focused on executing on our strategic plan and continuing to be responsive to customer needs as they adjust to rapidly shifting business conditions due to COVID. With that, we will now take your questions. Operator, we are ready to begin Q&A.

Questions & Answers:


Operator

[Operator instructions] Our first question is from Mike Latimore from Northland Capital Markets. Please proceed with your question.

Mike Latimore -- Northland Capital Markets -- Analyst

Thanks a lot. Yeah. Very nice quarter. Nice to see the execution and the industry tailwinds picking up here.

So I just wanted to touch on one comment you made. You said it was the best sales quarter in the company's history. So just to clarify, it was the best bookings quarter in the company's history. Is that right?

Jeff Ray -- Chief Executive Officer

Mike, thanks. This is Jeff. Obviously, we don't comment on bookings, but you can read into that exactly what you're saying. Just great traction, a very, very fast start to the quarter also, where we saw a nice uptick in deals getting closed literally from the very, very beginning of the quarter.

And it didn't let up throughout the quarter. Also, a very, very healthy pipeline, marketing pipeline generation in quarter and a very, very healthy close rate, which we believe can be repeated, one of the key reasons why we were comfortable reinstating guidance.

Mike Latimore -- Northland Capital Markets -- Analyst

Great. And then so just on the bookings flow. So you said you started off the quarter well. I guess, did it sort of build throughout the quarter? Like was June the strongest month of the quarter?

Jeff Ray -- Chief Executive Officer

Yes. It was. Yes. It was.

Yes.

Mike Latimore -- Northland Capital Markets -- Analyst

OK. Great. And then the other thing I just want to clarify, did you say you think you might be able to get back to normal dollar retention rates in the second half of the year?

Jeff Ray -- Chief Executive Officer

That's our intent. We spent a lot of time looking at what is up for renewal, what the relative health of the customer is, the nature of the contract, a lot of these are legacy deals that we're still dealing with. And so as we go through that rationale, we feel pretty good about how the second half looks, but we're not taking anything for granted. We're all over this.

Mike Latimore -- Northland Capital Markets -- Analyst

Yes. And I guess just last question. It seems like the demand for your core products is kind of across the board. I guess that's one question.

Second, is the biggest incremental area of demand, these live events? Is that fair to say?

Jeff Ray -- Chief Executive Officer

Yes. Certainly, in the last 45 days of the quarter, the live events skyrocketed for all the obvious reasons that we've shared and that you would expect. Everyone is trying to figure out how to connect with everyone else and everyone's live events have been canceled. Fortune 1000 customers spend 1 to 3% of their revenues on events.

Some are pretty high in heavily regulated industries where they're restricted in their ability to do traditional marketing. And so live events become very important and so we've certainly seen an uptick in that and we expect that to continue. And as we've noted earlier, we think the future is hybrid. And as we talk to some of the pure event companies that are out there, because as you can imagine, we're in discussions with them.

They don't think that we will ever go back to 100% live events. If the actual ideal model is a hybrid model, where, yes, there will be a live event for where you're pushing your brand to your most loyal patrons. And at the same time, the nice thing about a virtual event is it goes on and on. For example, our PLAY TV replaced our three-day live event in May, but it continues to live.

We continue to put up content. People continue to jump in and consume and engage. So the virtual events can go on and on throughout the year.

Mike Latimore -- Northland Capital Markets -- Analyst

Great. Thanks a lot. Good luck.

Jeff Ray -- Chief Executive Officer

Thanks. Thanks, Mike.

Operator

Our next question is from Steven Frankel from Colliers. Please proceed with your question.

Steven Frankel -- Colliers Securities -- Analyst

Good afternoon, Jeff. Thank you. Congratulations. So I wanted to start with double checking on whether or not you still believe this is a double-digit growth business?

Jeff Ray -- Chief Executive Officer

Yes. They do. Absolutely.

Steven Frankel -- Colliers Securities -- Analyst

OK. And then maybe trying to understand the bridge to get there, when we look at the impressive growth in premium ARPU per customer, how much of that is coming from new customers coming in at significantly higher ARPU on a starting basis versus successfully upselling the installed base as it's rolling over?

Rob Noreck -- Chief Financial Officer

Yes, Steve. This is Rob. We've actually got a pretty successful and pretty balanced approach to that. So we're able to mine the existing customer base and land new customers.

Steven Frankel -- Colliers Securities -- Analyst

OK. You'd say it's coming from both. And as you hinted in your discussion around the recurring retention rate in the back half of the year, are we getting close to the bottom in terms of the premium customers that you landed in the past that you're probably not a strategic vendor for us, so they're not likely to renew? And so we could be close to a time where the premium customer count starts to level out and maybe grow?

Jeff Ray -- Chief Executive Officer

I think that's fair to say. Certainly, with the kind of sales team that we have now, and the heightened discipline that we have and how we're screening prospects and turning them into customers, the structure of the deals, the pricing of the deals and the nature of the kinds of problems that we're solving, all of those things we expect will lead to stickiness that starts to approach a traditional SaaS company. We also believe that for media companies, products like Beacon, our OTT solution, are naturally much, much more sticky than just selling an OVP platform and so we feel good about that. And then finally, we've talked a little bit about the fact that we're opening things up to the partner community.

We intend to have a robust partner community of both providers and sellers, resellers, distributors, and channels, but also technology partners that will find it attractive to sell their add-ins into our platform as we open that up. So broadening the apps rapidly allows customers to see greater value for their unique needs. And that will help keep the platform in place.

Steven Frankel -- Colliers Securities -- Analyst

OK. Great. And Rob, what were overages in the quarter?

Rob Noreck -- Chief Financial Officer

Overages were about 1.6 million. So they actually -- in the quarter, they were a huge contributor to the beat. The beat was actually driven by the sales execution and getting those deals done earlier in the quarter.

Steven Frankel -- Colliers Securities -- Analyst

So that's a great sign. And any commentary on the current quarter in terms of whether that pacing that you saw in the June quarter has continued thus far in the early days of Q3?

Rob Noreck -- Chief Financial Officer

Yes. No. We're not going to comment on that. I know we did build some conservatism into the model, and one good quarter of sales execution is not a trend.

Jeff Ray -- Chief Executive Officer

Two good quarters, Rob, two.

Steven Frankel -- Colliers Securities -- Analyst

All right great. Thank you.

Jeff Ray -- Chief Executive Officer

Thank you, Steve.

Operator

[Operator instructions] Our next question is from Lee Krowl from B. Riley FBR. Please proceed with your question.

Lee Krowl -- B. Riley FBR -- Analyst

Great. Thanks for taking my questions and congrats on solid execution. First question, just wanted to -- maybe you can provide a little color on the extent of the momentum in the quarter. Was the promotional program you guys kind of called out on the last call, a contributor to some of that closing momentum that you talked about in the quarter? Was there conversion of those promotions?

Jeff Ray -- Chief Executive Officer

Yes. It was. As many of you may not remember, as soon as the crisis hit, we announced free live streaming program for up to 50 hours, plus some consulting to help customers stand up and have a good experience. Those led to some conversions into some nice business deals for us.

And in fact, we've got a nice pipeline that came out of that. The sales team is engaging with customers on that.

Lee Krowl -- B. Riley FBR -- Analyst

Got it. And then secondly, gross margin tick down in the quarter. And I think based on some of the commentary last quarter that there was an expectation for an improvement in the second half. I guess what caused the downtick and what are the revised expectations for gross margins for the rest of the year?

Rob Noreck -- Chief Financial Officer

Yes. So what we saw, as you know, we've got the ratable revenue model. So we saw that straight line, and we saw an uptick of some of the usage costs that we have running through gross margin. So as we saw kind of video usage explode, we saw some of our costs run higher than we thought they were going to.

And as we get into the back half of the year, as you know, we've got the model where as a customer goes over an entitlement, they go and no overages. So we expect that to right itself a little bit in the back half of the year.

Lee Krowl -- B. Riley FBR -- Analyst

Got it. And then last question from me. You guys kind of had a proactive approach with certain customers and verticals that were impacted by COVID-related shutdowns. I think sports was included in that.

Are a lot of those measures remediated? And I guess is there any still embedded uncertainty around customer credit risk or anything like that in terms of customer bankruptcies or any such thing in the second half?

Jeff Ray -- Chief Executive Officer

We're certainly watching it closely. As I noted, we are actually quite impressed with the resourcefulness of the sports-related live streaming customers. They scoured the market, and they found content to post. For example, Australia picked up on the Korean Baseball League.

It turns out there are quite a lot of Aussies that are playing in that league. It's essentially in the same time zone. That got a lot of traction for them. India found cricket leagues that we're playing in the Caribbean, and they started streaming those to get great success.

So when their backs were up against the wall, they got very, very resourceful, and they found content and people are so hungry for content. They're watching it. So we don't know what tomorrow will bring, but we're in awe of the resourcefulness of our customers.

Lee Krowl -- B. Riley FBR -- Analyst

Got it. Thanks for taking my questions, guys.

Jeff Ray -- Chief Executive Officer

Thank you, Lee.

Operator

We have reached the end of the question-and-answer session. I will now turn the call over to Jeff Ray for closing remarks.

Jeff Ray -- Chief Executive Officer

Thanks, Jamali, and thanks everyone for joining in. This one was a lot of fun. We're excited about the momentum that we're carrying into the second half of the year that's why we were comfortable giving out guidance. We know that our products more than ever are highly relevant.

As I said recently in an interview with a member of the press, this really is an evolutionary moment for video, not revolutionary. It is natural for people to gravitate, to find new and better ways to connect with one another. Video is a very natural way to do it. So that certainly, while we see some initial pops from the COVID crisis.

We also see that this is very, very sustainable for us. And then finally, I'm thrilled with the dynamic of our sales and marketing team in engaging and winning in the marketplace. Thanks, everyone. Stay safe, and we'll be talking to you next quarter.

Bye.

Operator

[Operator signoff]

Duration: 40 minutes

Call participants:

Brian Denyeau -- Senior Vice President, International Sales

Jeff Ray -- Chief Executive Officer

Rob Noreck -- Chief Financial Officer

Mike Latimore -- Northland Capital Markets -- Analyst

Steven Frankel -- Colliers Securities -- Analyst

Lee Krowl -- B. Riley FBR -- Analyst

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