ServiceSource International, Inc.
Q4 2020 Earnings Call Transcript

Published: 26 Feb 2021

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the ServiceSource Fourth Quarter and Full Year 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. As a reminder, today's conference call is being recorded. I will now turn the conference over to your host, Ms. Elise Brassell, Head of Corporate Communications. Ma'am 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 31, 2020. On the call today are Gary Moore, ServiceSource's Chairman and CEO; and Chad Lyne our CFO.

[Gary Moore:]

Thanks so much, Elise, and welcome everyone to our earnings conference call for the fourth quarter and full year 2020. As we reflect on the accomplishments of 2020, it's important to first appreciate and acknowledge the global ServiceSource team. Your perseverance drive to perform for brands we serve and determination in the face of significant disruption caused by COVID-19 allowed us to deliver for our clients and meet our commitments. I have led companies through many economic cycles and external shock, yet this has been a year like none of us have ever seen before. And while our teams have not been physically together for most of the year, our company continues to demonstrate our values of dedication, collaboration trust and caring. As a team, we enter 2021 stronger and better positioned to fulfill our vision of transforming the B2B customer journey experience. In the fourth quarter and over the course of 2020, our teams delivered for our clients during a time of wide-ranging disruption. Through this period, we grew closer to the world-class brands we serve and improve the health of our partnerships.

[Chad Lyne:]

Thank you, Gary and good day, everyone. It's a pleasure to join you today and I look forward to sharing more detail on our fourth quarter and full year 2020 financial results. I will also spend a few minutes providing some context for how we are approaching 2021 as we position our company to address the opportunities and challenges that Gary shared. On balance, we executed well in 2020 and finished on a strong note with clear indicators of progress across the business, despite a challenging external operating environment. Our disciplined execution and expense rigor drove sequential and year-over-year improvements at many levels of our P&L. Our focus on our people, culture and organizational structure contributed to meaningful gains in our productivity and unit economic metrics. And our Clients for Life operating philosophy and market-facing investments resulted in higher satisfaction, new business wins and revenue growth at many of our largest and longest tenured clients. We also pivoted and moved quickly to course correct any areas that were not in line with our internal targets. Gary touched on our bookings and churn results not meeting our full year expectations given the impact of COVID-19 on our clients and prospects. That said, we also saw opportunities to upscale our talent, improve our execution, enhance our solutions and refine our pricing to better compete and win in the market. We are encouraged by the early results and look forward to ongoing progress here. Now let me walk you through our Q4 and full year 2020 results. Turning first to Q4. We generated revenue of $51.1 million down $3.8 million or 6.9% year-over-year. We benefited from some strong sequential and seasonal growth at several of our larger clients. Customers who had been on the sidelines and delayed purchase or renewal decisions over the course of 2020, finally came to the table and transacted at year-end. This uplift on some of our pay-for-performance engagements helped to offset more than $5 million of year-over-year contraction tied to churn or proactively rationalized accounts.

[Gary Moore:]

Thank you, Chad. I began this call by thanking our employees for how their perseverance drive and performance allowed us to deliver on our brand promise and commitments to our clients. I am incredibly proud, of how this team showed up every day to generate the results we just shared. I also want to extend my appreciation to our client partners, who placed their trust in us, to help ensure their businesses came through this period stronger and better positioned for the future. And, finally, thank you to our stockholders who share our conviction for the future and our ambition for what we are building towards. With that operator, please open the call for questions.

[Operator:]

Thank you. Our first question comes from Josh Vogel of Sidoti. Sir, your line is open.

[Josh Vogel:]

Thank you. Good morning, Gary and Chad.

[Gary Moore:]

Great Josh.

[Josh Vogel:]

Good morning. So first question, you took steps and you produced a very strong and impressive gross margin in Q4, full year was up 130 basis points as well. Understanding there are quarterly fluctuations. But how do you think about the margin profile of this year and longer term?

[Chad Lyne:]

Yeah, Josh I'll go ahead and take that and then pass it over to Gary for any other comments. But no to your point, we are really proud of how we executed through the year not just on the top line and from the sales activity that Gary mentioned but to be able to drive that margin uplift not only in Q4 but like you mentioned on the full year. A lot of activity taking place behind the scenes to drive that, obviously, from a productivity standpoint, really proud of how our teams executed in a pretty tough and dynamic macro environment given some of the headwinds that Gary mentioned were the SMB segment and the big market categories that we work on conversions were down. And people just pushed pause on starting to make a decision whether to renew or buy from our clients. So that has some impact to us, but our teams continue to push through that drive greater productivity. And you see that in some of the unit economics that we mentioned where our head count was down on the full year about 13% year-over-year, but our revenue per employee was up 7%. So driving that greater productivity on a per unit basis and per person basis really helped to drive that and we continue to take cost out of the business in other areas. We had some nice tailwinds from travel and expense standpoint. And we did benefit from changing our model in the face of COVID, rationalize some of the footprint that we have around facilities. So really Josh just grinding through a lot of stuff within the expense space and continuing to invest in the areas that we think will unlock growth opportunity going forward. So I'd say, proud of the results on the full year. As we look forward, I think Q4 really does show the benefit and the impact of scale in our business as well where incremental revenue dollars where you see several million dollars of incremental revenue in Q4 versus Q3 falls fairly meaningfully to the bottom line. So as we continue to drive new bookings, reduce churn and get that incremental revenue coming into the business that is where you'll see the leverage in our model both from a GP standpoint and adjusted EBITDA longer term net debt is what gives us confidence in the trajectory that run over a multiyear horizon. Gary anything else to add there?

[Gary Moore:]

Yes. Sorry, Josh, what did you say?

[Josh Vogel:]

No, I think Chad was asking if you had anything to add to that, but that was very insightful. Thank you.

[Gary Moore:]

Yeah. I think -- go ahead please.

[Josh Vogel:]

Okay. I was going to shift gears a little bit. When -- 81% renewal rate on the -- whatever contract value was coming up last year is pretty impressive in the overall scheme of things. I was just curious how much revenue -- just trying to get a sense of the pipeline that's all coming into this year, how much revenue did that 81% represent?

[Chad Lyne:]

Yeah I'll go ahead and take that first Gary. Josh it's not a number that we pay out there and put out publicly. I think we are pleased to see the 81% on the full year just given that broader macro. But like we said in our prepared remarks it wasn't to the level that we wanted. Just to be candid, we had higher performance in 2019. We expect it to do even better than that in 2020 but obviously then the pandemic hit and did cause some impact with some of our clients to make decisions that they're rationalizing their expense base and repositioning spend had some downstream impacts to us. So we're pleased with the 81% on the full year, we would like it to be higher and we expect better results going forward into this year. But it is kind of the -- as we think about the look that we provided as we think about the cadence through 2021 on more of a first half versus second half basis that is one of the components that does drive the first half compare to be in that range that I talked about. As the churn rolls off and we have the impact from the large client that we mentioned and some of the other stuff that we proactively exited in the business, we'll net against that with the new wins that we had throughout 2020 and the new wins that we expect to bring in, in 2021. But the timing of that does create a bit of a drag for another quarter or two.

[Josh Vogel:]

No, that makes sense. I think -- sorry. Go on Gary. Sorry about that.

[Gary Moore:]

Yeah. No that's fine Josh. I was just going to add a bit to that. Clearly that's not in the target that we had laid out. And all things considered the things that we had under our control I think we managed very well, but clearly disappointing. But the pressures that some of our clients were under made them make some decisions that cost us a bit of business. But I think the major drag from the large client is behind us. And we're planning for that. So that doesn't mean it won't happen. But I think we're in a much stronger position to get back to that target range that we've laid out of 5% to 15%.

[Chad Lyne:]

I think, Josh, just…

[Josh Vogel:]

Yeah.

[Chad Lyne:]

No. And one last piece I'd just tie off on there Josh. As the teams are very focused on and we've talked over the past year plus about the investments that we've made in our global account management organization, as well as other client-facing roles. We're really seeing the benefits of that both from a churn and a new business standpoint. We talked earlier about the selling new business into seven of our top 10. So some of those did have some business that went away or engagements that reduced in scope, but being able to sell into 70% of our top 10, something that we're proud of. As we look at this year, really a fairly normal cadence with a bit more than half of our business coming up for renewal again in 2021, spread pretty evenly quarter-to-quarter. But we do feel proud we had our largest client was in that cohort in Q1 and we were able to get them here in January renewed for another three-year term. So teams are out in front of it, high area of focus and we feel pleased with the progress that we're seeing so far here year-to-date.

[Josh Vogel:]

Yeah. That's good to hear. And I don't think you can get things for the fact of the events that took place last year. So the fact that you didn't necessarily hit your target, but it was things that were not within your control. So I think that's understood. And just -- I may have missed it and you did talk about, but from that large client revenue is down over $10 million year-over-year. Is that anniversary fully, or is there going to be additional top line pressure coming from that client early this year?

[Gary Moore:]

This is -- it's a great question. And I think from our point of view, the reason that that revenue has -- that business has declined was certain aspects of the work that we were doing they felt they wanted to bring back in-house. We've also signed new revenue with that same client and they're still in our top 10. So they're not insignificant, relative to the size of revenue that we still have. We have a great relationship and one of the highest Net Promoter Scores that we get from any client. So I think it's -- if I understand their strategy and I was on the phone with them yesterday as recently as yesterday, I think we're in pretty good shape with the planning that we have in place. And it's always hard to call the bottom when there's still economic stuff going on. But there wasn't as much economic as just shifts in their own business that is natural as well as some things that they've decided they need to bring in house. But I feel very good about where we're positioned.

[Josh Vogel:]

Great. And just one more. Seems like a very strong financial profile. Can you just talk a little bit about capital allocation and deployment priorities? Are there any gaps in the portfolio if we -- from an M&A perspective? Just general commentary around that please?

[Gary Moore:]

Yeah. I'll give that one to Chad to talk a little bit, but the opportunity we have is to really focus on the cash that we have and the strength of our balance sheet which we feel very, very comfortable with. And as we look at opportunities to partner and add to the portfolio, we'll continue to do that. But relative to M&A activity, we wouldn't be opposed to going after something, if it really made sense and was accretive to our value. So I think from that point of view, it's not -- we're focused on our core right now and we're going to continue to do that and keep our eyes open in the market. Chad?

[Chad Lyne:]

No. I just -- I would echo all of that commentary of Gary Josh. We do feel really -- we do have a very solid balance sheet, great liquidity profile. And even as you look at the 2020 results from a free cash flow standpoint, cash consumption et cetera generally in line with our plan and we actually touched the opportunity through the pandemic to lean in on some investment priorities around our virtual first operating model. We mentioned some of the CapEx associated with the refresh of all of our endpoint technology devices to enable our people to be more efficient and productive and engage in that new world of work. So as we look forward longer term like Gary said, it's -- we'll continue to be very disciplined around managing that cash, given the broader macro and some of the uncertainty that we still see out there over the next couple of quarters. Right now there's really no other intention for the use of that cash other than running the business and continuing to invest internally for that future. So where we do see areas to lean in where we're seeing greater ROI from things that clients are asking us to do we'll continue to do that. But in the interim no immediate view of doing anything around buybacks or dividends or M&A like Gary said. We do keep our eyes and ears open and are aware of opportunities. And to the extent anything makes a lot of strategic sense and can accelerate things on an inorganic pathway, we'll obviously consider those. But right now, focusing on the core operation of what we see the great opportunity going forward.

[Josh Vogel:]

Great. Gary. Thanks for taking all my questions.

[Gary Moore:]

Hey, Josh. Thank you. Great questions.

[Chad Lyne:]

Josh, thank you.

[Operator:]

Thank you. I'm showing no further questions at this time. I'd like to turn the call back over to management for closing remarks.

[Gary Moore:]

Thank you very much. So with no further questions today, we'll go ahead and close the call. Chad and I certainly appreciate everyone joining us. We look forward to hopefully speaking to many of you at some of the upcoming virtual investor conferences and more. So thank you all very much.

[Operator:]

Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all participating. You may now disconnect. Have a great day.