ServiceSource International, Inc.
Q1 2021 Earnings Call Transcript

Published: 1 May 2021

[Operator:]

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the ServiceSource First Quarter 2021 Earnings Conference Call. As a reminder, this conference call is being recorded. At this time, I would like to turn the conference over to Ms. Elise Brassell, Head of Corporate Communications.

[Elise Brassell:]

Thank you, operator. We appreciate everyone joining us today and welcome to ServiceSource’s earnings call to discuss our results for the first quarter ended March 31, 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 yesterday 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.

[Gary Moore:]

Thank you, Elise, and welcome, everyone to our earnings conference call for the first quarter of 2021. I’m happy to join you today to discuss our first quarter results. In our last call, we shared our expectations that our path to growth and improved profitability would become more apparent later in the year based on anticipated improvement in our go-to-market and operational execution. Today, I’m pleased to share that we continue to make progress on our objectives, and we are gaining greater confidence to reach the future we envision. While there are certainly still elevated levels of uncertainty globally, we are encouraged by early signs of strengthening in the markets we serve. Market research firm Gartner this month raised their Global IT forecast for 2021 from 6.2% year-over-year growth to 8.4%. And we share this optimism that conditions will continue to recover as the year progresses. Perhaps part of this belief is due to technology’s ability to connect all of us. It’s worth noting that the events of the last year have reminded everyone of the value of personal connection and relationships. Social and business networks have gotten smaller and more focused on those that add value to our daily lives. Our clients, too, are focused on getting closer to their customers and fortifying the value of their existing relationships. As a company that enhances and preserve relationships, ServiceSource has seen underlying momentum from this alignment of market need with our business strategy. We have focused on solid execution across the business to start the year and also on our ability to successfully deliver the deeper, stronger connections that our clients need, well beyond the pandemic.

[Chad Lyne:]

Thank you, Gary. It’s good to be back with everyone today, and thank you for joining us. I will echo Gary’s comments that we executed well in the quarter and in many areas, paced ahead of our internal expectations. There is still plenty of year in front of us and heightened levels of uncertainty continue to persist globally, but we are increasingly encouraged by some of the early market indicators we are tracking and the green shoots of activity we are seeing in the business. Before I turn to Q1 numbers, let me touch on a few things, so you understand where our attention, priorities and investment are being directed. As a team, we continue to focus on the 4 pillars that underpin our multiyear transformation strategy, inspire success, impact scale, ignite sales and innovate solutions. Throughout the company, we are pleased with the level of activity and urgency we are seeing on these pillars and the overall progress we are tracking on the respective internal KPIs. The holistic focus and investments we have made in the employee experience, encompassing compensation, benefits, training, culture, diversity and inclusion, career development and tools and technologies, among other areas, are allowing us to recognize tangible benefits from a more loyal, tenured and productive team. In Q1, our employee tenure reached the highest level on record and is up approximately 85% from where it was 2 years ago. That’s incredibly important as we primarily support complex B2B sales motions for very technical products and solutions. While there are multiple components to our value proposition, the quality of our talent, coupled with process and technology, is a key differentiator in competitive situations and to partner versus build scenarios. Having a more highly skilled, technically proficient and on-the-job experienced workforce is allowing us to deliver improved productivity and higher and more consistent outcomes for our clients. Through these enhanced outcomes, we start to benefit from a flywheel of sorts. Happier clients are more inclined to renew their contracts and expand their level of investment with us. They are more willing to take calls from our prospects and share their success stories, which helps accelerate our sales cycle.

[Operator:]

Our first question the comment comes from the line of Josh Vogel from Sidoti & Company.

[Josh Vogel:]

Couple of questions here. A couple of questions. Last quarter, you had a -- and I may have missed it in your prepared remarks. So you mentioned that how much revenue per employee was up, and I think it was around 7%, and that was with full year headcount down about 13% from a year prior. So I’m just curious, how much additional capacity or productivity gains can you drive from the existing base before you start to reinvest in headcount additions? Or maybe another way to ask is, what do you necessarily need to see in the marketplace to get comfortable bringing additional heads on board?

[Gary Moore:]

Yes. Thanks, Josh. And Chad, you’re welcome to jump in here if I miss something. But clearly, quarter-to-quarter, we -- the headcount was about flat. So not a lot of change there. And given the ramp of the new business, the efficiency was about the same in terms of revenue per head. So from that point of view, we didn’t have any material change that we thought we should call out, and that’s why it wasn’t as part of our remarks. That said, as we look at all of the things we’re investing in, and we talk about Click-to-Renew, we talk about the RPA and the value of that, and it’s early days for that stuff. And we’ve been pushing on those things for quite some time, and we’re seeing good progress. I think also the efficiency of the team in terms of the teamwork, the communications that we have, the tools that we’re using now, the -- there’s just a number of things that we’re automating, and -- so there is additional leverage. I don’t think I could or should put a number on it, but we do expect to continue to expand on our productivity.

[Josh Vogel:]

I appreciate those insights. Shifting gears a little bit, a really good contract renewal rate, a nice tick up from the around 80 -- I think it was 81% in Q4. Is that -- is this back to pre-pandemic levels or perhaps even a little higher than your historical rate?

[Gary Moore:]

It’s higher than our historical rate. As a matter of fact, you have to go back several years to get this kind of rate. Q1 of last year, and -- was also around 95%. The difference is a large portion of this year’s renewals was in Q1. So it’s more weighted. So we feel really good about what we were able to get done in Q1. We’re really focused on it as we closed out last year and really pleased with it. My hope would be that we can continue to drive a very high renewal rate, and we’re seeing that in the way we’re delivering for our clients in terms of the performance targets that we mutually agreed to, as well as how quickly we’re ramping to the changing environment. So I think, churns are never going to go away or go all the way to 0. But I think our plans for ‘21 -- and we set this plan last year -- have us closer to the middle of that lower part, so the 5% to 15% target that I’ve talked about over time. And our global account management and the structure that Mike Naughton has put in place for the global service deliveries team. We have a number of client for life initiatives and they’re paying dividends. It’s not just talk. It’s real people and technology investments that are delivering and executing to the metrics we agreed to with our clients. So Josh, we’re really pleased with Q1 and then have high hopes and execution to continue that.

[Chad Lyne:]

And Josh, the other thing I had.

[Josh Vogel:]

Yes, sorry.

[Chad Lyne:]

No, the only thing I’d add on to that, Josh, is the other point of pride that we have with respect to the Q1 performance in comparing to last year or previous years is the amount of multiyear renewal that we did have as well. Gary touched on the one large one with one of our top 3 clients being a 3-year renewal. So again, I think it really just does point to the level of comfort, confidence that our clients have in us and our ability to execute and to structure something over the longer term that aligns with their business priorities and strategies. So pleased with that. And obviously, that does eases the burden we have to execute every day, but that does the burden in terms of having these renewals come back in every 12 months to have some of those multiyears and continued performance there.

[Josh Vogel:]

Yes. That actually leads into my next question. When we think about -- let’s just take Q1 as a snapshot. Of that 95%, how much of that was renewed at multiyear versus 12 months?

[Gary Moore:]

Go ahead, Chad.

[Chad Lyne:]

Yes, about.

[Josh Vogel:]

You may not have that at your fingertips, but I’m just curious.

[Gary Moore:]

Go ahead, Chad.

[Chad Lyne:]

Yes, little more than 2/3 of that, Josh, was renewed out for more than a year.

[Josh Vogel:]

And what about the pricing on these renewals?

[Gary Moore:]

And Josh…

[Josh Vogel:]

Yes, sorry.

[Gary Moore:]

No, I was just going to add to -- Chad made a great point there. I think if you think about -- also, not just the multiyear, but the -- our ability to upsell and extend some of the renewals to a higher revenue number, basically, we’ll retain 100% of the revenue in general there. So I feel really good about the performance and the execution of the team.

[Josh Vogel:]

And just thinking about the pricing on renewals, is it stable, better? Or have you been giving any concessions?

[Gary Moore:]

Yes. There’s always pressure. But if you’re able to demonstrate a higher level of value and extend a contract, we feel better about a multiyear and giving up some price on that because we know we can get it back over time. So it depends on the deal. But yes, we’ve seen some pressure. But you have to also remember that for the last 2 years, we’ve been renegotiating a lot of contracts to improve the financials, and we’ve been able to do that, not just with price, but the way that we’ve performed the work and where we’ve performed the work.

[Josh Vogel:]

Understood. I got a couple more here. So I just want to shift gears a little bit. Thinking about the new capabilities you’re providing for clients today, you’ve highlighted RPA, Click-to-Renew. I’m curious what the average ramp time on that type of work versus your historical programs? Does it take longer? Is it shorter? Can you just give some insights on that?

[Gary Moore:]

Yes. Well, my -- it depends, which is not a very good answer, but it does depend on the complexity of it. As I mentioned, the Click-to-Renew is no touch. And you’ve got a number of different data points in clients, you’ve got a number of different SKUs and that kind of thing. So I think I mentioned that the pilot that I referenced in my comments, we’ve been delivering on that from August of last year. So it ramped slower than what I think we will be able to ramp things in the future because we’re learning, right? And so it’s hard to give you an answer, but that’s certainly something we’re going to track and something that we’ll continue to make improvements on so that we can ramp much more quickly.

[Josh Vogel:]

I got you. And to use your words, Gary, you mentioned pioneering new innovation. Does that mean you plan to build out the platform and capabilities internally? Or would M&A potentially be on the table?

[Gary Moore:]

Everything is on the table, Josh.

[Josh Vogel:]

I got you.

[Gary Moore:]

I don’t know -- I mean, there’s a lot of great technology. I mean we’re using UiPath for our RPA stuff, and we’ve been a early user of their technology. We have an internal team that is really, really skilled in this area. We have clients that are working jointly with us, and in some cases, funding the work. So I feel really good that we will have a combination of both. I’ve said for the last 2 years, my preference is to partner, and make sure that we can prove things out. And then if coming together in a more formal way makes sense, then we’ll do that.

[Josh Vogel:]

I got you. And just last one. And I understand it’s a fluid situation, and this is not necessarily an easy answer here. But what kind of cost savings, like -- because, when you want to think about the long-term cost structure of the business and the leverage in the model, what kind of cost savings do you think you can see long term by moving to this permanent hybrid model with home offices being the primary location for many of your employees, and thus, less reliance on our real estate footprint.

[Gary Moore:]

Yes, I’m going to let Chad hit that one. But we have seen some pretty positive impact there. And we think we’ve got a fair amount more to go. Chad?

[Chad Lyne:]

Yes. Good question, Josh. I think if you look over the longer-term horizon, we have been very active in terms of rationalizing the physical footprint, if you will. So while we still have 11 offices in 8 different countries around the globe, and that’s a critical component of the value proposition for our clients to have that global coverage to be able to sell into 170 plus countries. The actual physical plant, if you will, is less necessary. And I think COVID has really shone a light on that and opened up people’s eyes to understand that you can access great talent anywhere, and we’ve been able to prove out over the past year that we can actually keep them productive, drive greater productivity. And as you think about the entire human capital value chain from recruiting, sourcing, training, onboarding, putting them into production, being able to do that at a very high level of effectiveness. So the model has shifted. And I think it’s not just us, we’re hearing this and seeing this from our clients and other tech leaders as well that they will have a more of a hybrid approach going forward. But in terms of your question about what does that unlock in terms of the cost structure. We’ve taken our physical square footage down about 1/3 over the past couple of years, probably have another room to run over another 1/3 in the coming years as well. So the number that I kind of soft circled, Josh, just on the facility side itself, potentially $5 million to $7 million of expense that we can get out over time. And then again, that last part over time is probably the critical one. Some of these are longer-term leases, the corporate real estate market is soft in many of the areas that we’re based. So we’ll be smart about either subleasing those, renegotiating as we can or as those come up for expiration stepping way or downsizing. So, a lot of work going on that front. Pleased with the progress so far, but more to go here in the years to come. And obviously, a key lever for the target model that we’ve put out there.

[Operator:]

Our next question or comment comes from the line of Jim Kennedy from Marathon Capital.

[Jim Kennedy:]

Listen very quickly. First of all, congratulations on the continued progress. Chad, I guess, this is a question for you. I just had a quick question on -- could you remind us of what the outstanding NOLs are at this point?

[Chad Lyne:]

Yes. Good question, Jim. On the federal side, its north of $350 million. I don’t have the pinpoint number around me, but I can follow-up with you. But north of $350 million in aggregate on the federal NOLs and then a similar figure of north of $300 million on these state and local NOLs as well. So, a substantial figure, and that’s to the question on M&A. That is one of the things that we look at as well as are there ways to unlock the value associated with those NOLs that are hanging on the balance sheet.

[Operator:]

I’m showing no additional questions in the queue at this time. I’d like to turn the conference back over to Mr. Moore for any closing comments.

[Gary Moore:]

Thank you very much, Harry. I’ll be quick here, but I do want to reemphasize a few things that Chad closed with, in his comments. We continue to be encouraged by the tone and the commentary that we’re seeing from our clients, as well as the outlook that we’re seeing from -- more broadly from Gartner and others about where the market is headed. But I want to remind everyone, we have a road in front of us. It’s early in the year. And the key thing for myself and the team is we’ve not changed our expectation for the cadence that we’ll see throughout the year that we talked about in February. But we remain very, very focused on returning to growth in the second half of the year as well as focusing in on the things that we can control and improve on. So I also want to thank our employees for delivering the way that they did in Q1. Their perseverance, drive, performance really allowed us to deliver on our brand promise and the commitments we had to our clients. I’m also incredibly proud of how the team has showed up relative to generating the results that we shared. I also want to extend my appreciation to our client partners. And we continue to deepen those relationships and place a lot of emphasis on our ability to use our clients as references and have them help us grow this business. And then, finally, certainly, I want to thank our stockholders who share the conviction that we have about the future of this company and what we’re building towards. And I really appreciate it as does the team. So with that, I’ll let call in, and thank you all very much.

[Chad Lyne:]

And Gary, really quickly, actually, before we do that, just so I can clean up an answer that I gave there to Jim. I appreciate the question and didn’t have it at my fingertips, but want to make sure I get the right number out there for everybody. Our net operating losses on the federal side as of the end of FY ‘20 were about $317 million, Jim. And then on the state side, we’re just shy of $250 million. So apologize from misstating that earlier, but did want to clean that up. And then as Gary said, thank you, everyone, for the support. Look forward to talking with many of you here in the days and weeks to come.

[Operator:]

Ladies and gentlemen, thank you for participating in today’s conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.