ServiceSource International, Inc.
Q4 2021 Earnings Call Transcript

Published: 23 Feb 2022

[Operator:]

Good day and welcome to the ServiceSource Fourth Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. I would now like to turn the call over to Elise Brassell, Head of Corporate Communications. You may begin.

[Elise Brassell:]

Thank you, operator. We appreciate everyone joining us today and welcome to ServiceSource's earnings call to discuss our results for the fourth quarter and full year ended December 31st, 2021. On the call today are Gary Moore, ServiceSource's Chairman and CEO and Chad Lyne, our CFO. As a reminder, our SEC filings and the earnings release we issued today after market close are available on our website at www.ir.servicesource.com. In addition, we have posted earnings slides to accompany our comments today. Shortly after this call, we will post an audio replay and a copy of our prepared remarks to our website. Before we begin, I would like to remind you that during the call, we will make projections or forward-looking statements that involve risks related to future events. All statements made during the call reflect our views as of today, February 23rd, 2022, and are based upon the information currently available to us. All projections and forward-looking statements should be considered in conjunction with the cautionary statements in the earnings press release and the risk factors included in our SEC filings, including our report on Form 10-K. These documents contain and identify important factors that could cause actual events and results to materially differ from those contained in our projections and forward-looking statements. And we disclaim any duty to revise or update any forward-looking statements. In addition, during the call, we will also be discussing certain Non-GAAP financial measures, which we believe provide additional information to enhance the understanding of how management assesses the operating performance of the business. The reconciliation of the GAAP and Non-GAAP measures can be found in the earnings release that accompany this call. And with that, I'll turn the call over to Gary.

[Gary Moore:]

Thank you, Elise. And our thanks to everyone for joining us for our earnings conference call for the fourth quarter and full year 2021. We closed the year on a strong note, demonstrating the power of our strategy, the value of our solutions in the marketplace, and the positive outcomes we deliver for our clients. Revenue growth accelerated to more than 9% in the fourth quarter, and was the strongest year-over-year compare since the first quarter of 2014. Furthermore, we return the business to full-year revenue growth and more than doubled our annual profitability on an adjusted EBITDA basis. I am incredibly proud of how our teams performed throughout 2021, we built upon the foundational work from previous years and further improved the fundamentals of the business. We executed well against our strategic objectives and priorities and pursuit of our long-term vision. And we made important strides on our multiyear transformational journey towards our target model objectives. Reflecting on this journey, I am reminded of the remarks I made on my first earnings conference call as Chairman and CEO three years ago in February of 2019, I tried to be clear that we would not pursue a quick hit short-term strategy. Rather, we would be methodical and disciplined as we sought to sustainably and durably improve our execution, financial results, and enterprise value. To accomplish these objectives, I also shared with you that our time and energy were going to be focused in three key areas

[Chad Lyne:]

Thank you, Gary. We appreciate everyone taking the time to join us today. I will echo Gary's comments that we are very proud of our global team. 2021 was an important year for ServiceSource as we inflected back to growth and accelerated our progress toward our target model objectives. The investments we have made in our people, processes, and platforms, coupled with our virtual first operating model and clients for life philosophy are differentiating us as a market leader and innovator. Our commitment to our strategy, our alignment to our client success, and our focus on operational excellence, enabled us to deliver improved financial performance throughout the year. The progress we demonstrated in 2021 strengthened to the conviction we have in our long-term targets. And we will maintain our focus and discipline as we seek to build on the past year's accomplishments going forward. On today's call, I plan to cover three areas. First, I will share some of the key business highlights and operational metrics that underpinned our strong performance. Second, I will recap our fourth-quarter and full-year 2021 financial results. And third, I will discuss our contextual outlook and expectations for the year ahead. Let's turn to our key business highlights starting with our go-to-market activity in the gains we have seen there. Our unique value proposition underpinned by our integrated customer journey experience solutions suite and outcome centric model is resonating well in the marketplace. Companies are making larger and bolder investments behind their customer growth and retention initiatives. Our capabilities, expertise, and global footprint enable them to scale these investments with a more certain and compelling ROI. Fuelled by this dynamic, we are seeing improved activity and outcomes throughout the sales pipeline and funnel. Our account-based marketing campaigns, our elevating ServiceSource's brand awareness, and activating a large, addressable market. Our business development teams are having more client discovery meetings and converting more leads into viable opportunities. Our solution consulting teams are conducting a higher volume of sales performance analysis as they consult with more prospects to jointly develop compelling business cases. And our outside sales in Global Account Management teams are closing more of these opportunities, securing new clients, and expanding our scope within our installed base. Allow me to summarize the results of this improved go-to-market activity under Peter Flynn's leadership. New bookings in 2021 were up approximately 13% year-over-year, and more than 80% of the value we signed was with high-growth cloud and software companies. We added eight new clients in 2021, including five wins in the fourth quarter alone. We also earned expansions and wrapped new programs at the largest clients, which contributed to more than 8% year-over-year revenue growth at our top 5 clients. Our improved market momentum is directly tied to the strong performance of our global delivery teams. For many of our clients, we are entrusted to manage a large segment of their customer base and a meaningful portion of their revenue. To ensure we deliver on that, earn trust every day. Mike non and his leadership team have instilled end-to-end process discipline, and operational rigor that have improved the consistency of our execution and the value our clients realized from us. Our professional services teams have enhanced our implementation processes to support more program launches in ramping faster in green status. Our people and culture in learning and development teams have reimagined our talent strategies to attract, develop, and retain a highly skilled remote workforce in the face of a tight labour market. And our business intelligence data and IT teams have brought further differentiation to our solutions with more robust client insights, analytics, and automation. In addition to the growth these efforts unlocked, the impact is further reflected in record high client performance target metrics and in our contract renewal efforts. We successfully renewed or extended approximately 87% of the contract value that was up for renewal during the year, a solid gain from the approximately 81% we reported last year. Factoring in the upsells and expansions that we secured with some of these renewals, our net retention rate for the year was approximately 94%. Let's turn now to our financial results. Beginning with our fourth quarter, revenue of $55.8 million was up $4.7 million or 9.3% year-over-year. This was the second consecutive quarter with year-over-year growth in each of our regional theatres. On a year-over-year basis, fourth-quarter revenue in EMEA grew approximately 15%, in APJ revenue was up approximately 13%, and in NALA, revenue increased approximately 5%. Our fourth-quarter Non-GAAP gross profit was $22.3 million, up $3.2 million or 17% year-over-year. Our Non-GAAP gross profit margin was 40% of revenue, up 270 basis points year-over-year, demonstrating the contribution flow-through in our model when we scale revenue. Non-GAAP operating expenses were $15.4 million in the quarter and represented 27.6% of revenue, favourably down 320 basis points year-over-year. The combination of revenue growth, disciplined expense management, and cost reductions from our virtual first operating model drove strong bottom-line performance. Fourth quarter adjusted EBITDA was $8.1 million up $3.3 million or approximately 68% year-over-year. Adjusted EBITDA was 14.6% of revenue, a gain of approximately 510 basis points year-over-year. As told, Q4 marked a very strong finish to the year, with high single-digit revenue growth and mid-teens adjusted EBITDA margins, consistent with longer-term target model objectives we have shared with you in the past. Shifting to our full-year 2021 results. Revenue of $195.7 million was up $1.1 million or 0.6% year-over-year, marking our first full year of revenue growth since 2016. Revenue from program expansions and new client ramps sold during the year was the largest contributor to our performance, and more than offset revenue lost from in-year contractions or local churn. We generated year-over-year revenue growth at six of our top 10 clients, and in-aggregate revenue across the top 10 grew more than 7% through a combination of new scopes of work, underlying growth for the products and services we support for these clients, and higher conversion rates and end-user bookings. Continuing down the P&L, our non-GAAP gross profit was $64.3 million for the full year and reflected a margin of 32.8% of revenue, up approximately 20 basis points year-over-year. Full-year Non-GAAP operating expenses of $59.7 million were favourably down $5.6 million year-over-year. At 30.5% of revenue, Non-GAAP operating expenses were favourably down 310 basis points year-over-year. On a combined basis, our Non-GAAP cost of revenue and operating expenses were approximately 2.7% lower year-over-year, driven by the acceleration of our virtual first operating model and a flatter and more efficient organizational structure. Beyond the savings, we are very pleased with the better results and outcomes that we're seeing leveraged against the spend. The gains here were also net of year-over-year expense headwinds we faced, including approximately $3 million of combined impact from FX and lower COVID-related job support grants from the Singapore government. For the full-year 2021, adjusted EBITDA was $9.8 million or 5% of revenue, more than double the $4.3 million in 2.2% of revenue we generated in fiscal 2020. Moving onto the balance sheet and cash flow highlights, we ended the year in a strong position with a healthy balance sheet and liquidity profile. Cash flow from operations was $3.6 million for the year. Capex, inclusive of capitalized internally developed software, was $3.9 million, resulting in free cash flow of negative $0.3 million compared to negative $7.5 million in fiscal 2020. Cash, cash equivalents, and restricted cash was $30.8 million at year-end, down $5.5 million from December 2020, as we reduced our borrowings on our revolver by $5 million during the year. We ended the year with $10 million outstanding on the revolver, and had total available liquidity as of December 31, 2021, of $46.5 million. In summary, we are incredibly proud of how the teams navigated through the challenges and opportunities during 2021 to return the business to full-year revenue growth, to expand our margin profile, and to deliver the accelerated results we saw in the fourth quarter. Before we open the call for any questions, I want to take a few minutes to provide some context for how we are thinking about the year in front of us. Consistent with our philosophy from last year, we do not intend to provide formal or specific financial guidance either on an annual or quarterly basis. Gary and I will continue with our approach focusing on our long-term strategy and objectives, while transparently sharing market data points and any headwinds or tailwinds we may encounter as we work towards our target model ambition. Although there is clearly heightened volatility and uncertainty around the world, end-growth in global GDP in the IT industry is now expected to moderate this year. We will continue to align ServiceSource to serve dynamic growth companies in more rapidly expanding sectors. Inflationary pressures and competition for talent are concerns for all companies, but we believe our global footprint, virtual first operating model, and inclusive culture, give us an opportunity to support our clients in new prospects as they work to navigate these forces. The strategic shifts, investments, and moves we've made in recent years have all been directed at building a foundation for sustainable, profitable growth. As we scan the horizon for 2022, we are optimistic that we will build on the financial progress we demonstrated in 2021 in a way that we believe will be valuable for our clients, our employees, and our stockholders. With that, Operator, please open the line for questions, and then we will have Gary come back after any Q&A to close the call.

[Operator:]

. Our first question comes from Kyle Bauser with Colliers, your line is open.

[Kyle Bauser:]

Thanks. Hi, Gary and Chad. Congratulations on the really strong results of EBITDA in the quarter. I think your typical contracts are about one year and your success rate for renewals has been nearly 90% north of that for the year. Can you talk about how you've been able to maintain that? And also, when do you get visibility regarding a client's decision to renew for another year?

[Gary Moore:]

Yeah. Great. And Kyle, thank you for the comments and certainly thank you for joining. So our -- to be clear, our contracts are typically one to three years in duration. I think the important note here, though, is the relationships tend to be long-tenured. So when we get the scale with the client and when we deliver on our commitments and the ROI expectations that quite honestly we'd sold them, the average tenure goes up across our top 10 to 11 years. So around the renewals and extensions, we had 87% of the contracts that were up for renewal during the year. But due to upselling and I think a very important thing here is our net retention rate was about 94%. So we demonstrated really good success at upselling and expanding some of the contracts during the renewal discussions. Which is always something that we try to do, especially on the ones where we know we have outperformed. So we start having renewal discussions to the last part of your questions early on and far and advanced to the contract end date. Improving these rates has been a really strong focus for us and a long-term focus. And the areas where we've made targeted investments like global account managers, the investments we've made with our BI and data teams for driving customer and partner insights, the additional training and upscaling that we've put in place for our reps have all paid dividends there. So we feel good about the direction, we're not exactly where we want to be, but we feel very good about the progress we're making, we're headed in the right direction.

[Kyle Bauser:]

Got it. It's helpful. And maybe switching to headcount in the labour supply market. How has headcount changed over the past 12 months? And also as you scale, do you add across the board or are there specific roles that you'll be targeting as you add talent?

[Gary Moore:]

Another great question, Kyle. So I think the market has ended. We ended or has changed significantly. We ended the year with about 2900 employees. That's an increase of slightly more than a 100 employee’s year-over-year, and that's the support the new client wins and other program expansions. A lot of that change has to do with language requirements, geographic locations, et cetera. So we've been very methodical about flattening the organization where appropriate to allow leadership to be a lot closer to our people and our clients, and we've been disciplined about adding talent. So that growth is typically with -- in the rep area, and not necessarily in overhead areas. We feel good about the leadership team we have now, not just at the VP level, but directors and managers we have in the business really understand the business. I think I mentioned before in my remarks that the biggest aspect of our product is really our people. So that's where we've really put the investment. I remember when I was a client of ServiceSource back in my Cisco days, I was impressed with the calibre of people that ServiceSource had and I continue to be impressed with the talent that we attract and retain here, and I truly believe we have a world-class team. So that tenure is also increasing. Our average tenure is about three-and-a-half years. So we have a very experienced team with a lot of expertise and knowledge that they bring to bear for our clients.

[Kyle Bauser:]

Appreciate that. And maybe following up, if I may, a couple of more, how has it been recruiting new talent? What's the labour market being like for ServiceSource?

[Gary Moore:]

It's clearly a tighter market now than it was three or four years ago, but I think our people and culture, learning development teams have done a great job of re-imagining how we recruit, how we on board and train new hires as well as a virtual first operating model. So as part of that virtual first model, we've increased our talent market by more than tenfold. We previously had to hire within 30 to 60-mile radius of our delivery centre, and now we're able to attract talent in 10 states in the U.S. as an example, and then the communities outside major metros where our international offices are at. So a much bigger pool and really great talent, and as I pointed out, the Training and Development team has been able to really bring people on board and up to speed very quickly.

[Kyle Bauser:]

Got it. Got it. And then just lastly, as we look forward and contemplate your goals, how should we think about the key growth drivers? I guess in particular, I'm thinking about cross-selling within existing accounts and global expansion into emerging markets and new logos, etc. Just trying to understand how you're prioritizing each of these buckets. Thank you.

[Gary Moore:]

Sure. I'll let -- I'll tell you what, I'll let Chad answer that one and then we'll go from there.

[Kyle Bauser:]

Great.

[Chad Lyne:]

Yes. Thanks, Gary and Kyle, thanks for joining us today, again, and thanks for the question there. We do have within our earnings supplement slide and we've talked with you before as well, our target model ambition over a three to five-year horizon is to return the business to durably and sustainably having 10% plus year-over-year revenue growth. So we're pleased with the progress that we made in 2021, but still know that there's ways to go. As we think through that target model ambition, Kyle, there are really, really two leavers that are commanding our attention and a lot of focus. The first one there is continuing to grow our new bookings. We're pleased to see that 13% year-over-year growth in bookings in 2021. And I mentioned in my remarks about just the good activity and progress that we're seeing across the pipeline, and the funnel, and the conversion. But we're always looking for more and expecting to continue to accelerate the progression there on the new bookings front. And I'd say that new bookings growth looking for that to be diversified as well. So we are pleased to add the eight new clients in 2021 up from the six that we had in 2020 and our full expectation is that we will accelerate that progress and have a higher number of new logos in 2022 as well. While maintaining the focus. so we've had over the past few years, Kyle of continuing to attract very marquee brands in high-growth cloud and SasS areas of the market. I think the last thing I would hit on that bookings growth piece as well is also making sure that it's diversified. So not just on the new logo front, but making sure that we've got diversified growth across our installed base. We mentioned in our remarks about the growth that we start our top 10. So again, a great sign of the confidence that our clients are placing with us and the trust that we've earned through our performance to unlock those growth opportunities. So we expect that to continue, but we're very focused as well with the logos that we've added in the past several years of turning those into a true lane and expand motion. So whether it's taking on more of the opportunity that they have within their business, expanding into other geographies, moving into other business units or products or a key focus as well as if we might be single-threaded doing one sales motion for them, being able to expand that across the customer journey experience solutions that we've talked about. So one answer there, but that's really vector 1, if you will. And then the second piece, equally important, is making sure that we do a better job retaining what we have, and getting churn to a more normalized levels. So you had asked the question earlier about our renewal rates, pleased with the progress that we made in 2021 and looking to continue to accelerate that. We've talked for years now about our ambition and the target model objectives, assume that we get churn down to a 5% to 15% of prior year revenue range. So made good progress this year, but our full expectation with the improved execution with the team that we have, and with how our solutions are resonating with our clients, is to get that closer to the middle or lower end of that range. So cross those two things, new bookings and churn, clearly the priority is going to be making sure that we're driving margin accretive growth, and making sure that we continue and improve the tight alignment that we're seeing with our clients in generating this year at our line. So I'll probably sound like a broken record here, but we won't sacrifice quantity for quality. So we'll maintain vigilance about the types of clients that we bring on, the types of scopes of work that we undertake, ensuring that things are set up for success from day one.

[Kyle Bauser:]

That's great. And that's it for me. Thank you both and congratulations on the progress and results.

[Gary Moore:]

Right. Thank you, Kyle.

[Chad Lyne:]

Thanks for the question, Kyle.

[Operator:]

There are no further questions. I'd like to turn the call back over to Gary Moore for any closing remarks.

[Gary Moore:]

Thank you, Michelle. I'll be quick here. I think I'd just like to close by thanking our employees for a great 2021. Their focus was what led us to the results that we have, and I know that we're already focused on making 2022 an even better year. So thank you, again, to the sources that are out there. We're really pleased with the work that we've done to ramp new business faster, scale our capabilities smarter, and really improving the customer outcomes through the clients for live initiative that we started last year. I think in turn, that's allowed us to accelerate our financial results. So listening to our clients has allowed us to align our capabilities to address the pressing needs that they have and to repeat those digitally enabled growth customer engaged success, and the competition for talent globally. I think there's always going to be headwinds, but we believe firmly that if we focus on some of the things that we can control, we are well-positioned to take advantage of an increasing number of tailwinds. So I want to thank our investors and our clients for the trust and faith that they have in us and for those of you on the call. Thank you for joining us today. Have a great year. Operator, you can end the call now.

[Operator:]

This concludes the program. You may now disconnect. Everyone, have