ServiceSource International, Inc.
Q1 2019 Earnings Call Transcript

Published: 9 May 2019

[Operator:]

Good day, ladies and gentlemen, and welcome to the ServiceSource First Quarter 2019 Earnings Conference Call. At this time all participants are in a listen-only mode. Later there will be a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I'd now like to turn the conference over to Chad Lyne, SVP Strategy and Investor Relations. Sir, you may begin.

[Chad Lyne:]

Thank you, Shannon, and good day, everyone. Thank you for joining us, and welcome to ServiceSource's first quarter earnings call to discuss our results for the quarter ended March 31, 2019. As a reminder, a copy of our earnings release has been posted on the Investor Relations section of our website at www.ir.servicesource.com. On the call today is ServiceSource's Chairman and Chief Executive Officer, Gary Moore; and our Executive Vice President and Chief Financial Officer, Rich Walker. 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 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, but not limited to our reports on Form 10-K and 10-Q. These documents contain and identify important factors that could cause actual results to materially differ from those contained in our projections and forward-looking statements. And we undertake no duty to revise or update any forward-looking statements. In addition, during the call, we will also be discussing certain non-GAAP financial measures and projections which we believe provide additional information to enhance the understanding of how management assesses the operating performance of the business. You can find a reconciliation of the GAAP and non-GAAP measures in today's earnings release posted on the IR portion of our website. And with that, I'll turn the call over to Gary Moore, ServiceSource's Chairman and CEO.

[Gary Moore:]

Thank you, Chad, and welcome everyone to our first quarter 2019 earnings conference call. We started the year with solid progress on multiple fronts and I am encouraged by the initial cadence and early execution on our digital transformation strategy. Our teams drove strong performance across our installed base. We have a healthy level of sales activity with good sequential improvement and new business wins and our new global account management organization delivered well in engagements that were up for renewal in the quarter. While revenue of $55.5 million was down $3.1 million year-over-year, we successfully balanced the acceleration of net new digital investments and meaningful funding for our transformation initiatives against proactive savings and targeted non-core expense reductions throughout the company. The net result was a positive adjusted EBITDA of $1 million. On our fourth quarter 2018 earnings call, in February, I outlined our VSEM framework or Vision, Strategy, Execution and Metrics, the four transformational pillars that employees enterprise-wide are aligned to and held accountable against. As a reminder, these pillars are inspire success, which is about having an organizational culture that attracts, retains and develops world-class talent impact scale, which is about having a standardized, optimized and globally consistent delivery model that ensures client delight. Three, innovate solutions, which is about unlocking new revenue growth and profitability streams through emerging solutions, capabilities and technologies; and four, ignite sales, which is about bringing in high quality accretive new business with clients where our solutions, insights and outcomes allow for a mutually beneficial value exchange. Year-to-date I am generally pleased with our activity and progress on each of these pillars. Our first pillar of inspire success, we ended Q1 with approximately 3,700 employees. Since becoming CEO late last year, I've been continually impressed by the caliber and tenure of our professionals and the diversity of our teams. Highlighting two metrics that I'm very proud of across our global workforce, our average tenure during the quarter was two and a half years and from a diversity standpoint we are on the cusp of having a full 50

[Rich Walker:]

Thank you, Gary. I would like to reiterate the points Gary made about the good early progress we are seeing throughout the business as we seek to eliminate non-core activities, simplify our operating model, standardize our infrastructure and automate manual aspects of the business. While it would clearly take some time for the digital investments in transformation activities to bear fruit in our P&l and growth profile, we are confident we are making the right long-term decisions and taking the appropriate course of action for company, our clients and our stockholders. Turning to our results for the first quarter, Q1 2019 revenue was $55.5 million, down $3.1 million or 5.2% compared to the same period in 2018. Underlying these results was the loss of more than $7 million of quarterly revenue from logos that were churned or proactively exited over the course of the past year, which was partially offset by new logo wins and installed base expansions. At a client level, we continue to demonstrate solid growth with our largest relationships where we drove year-over-year revenue growth across seven of our top 10 accounts. When we look at our clients on a trailing 12 month basis through the first quarter, our top 10 grew at a rate of 6.9% over the comparable previous 12 month period. By region, NALA revenue for the first quarter of 2019 was $33.2 million, or 59.8% of our total, and compared to $35.5 million in the prior year period. EMEA revenue was $13.6 million or 24.6% of our total and compared to $15.5 million in the prior year period. And APJ revenue was $8.7 million or approximately 15.6% of our total, up approximately 14% from $7.6 million in the prior year period. On the non-GAAP gross margin front, Q1 2019 was $17.1 million, or 30.8% of revenue, a decrease of $2.8 million and 310 basis points year-over-year principally due to the lower comparable top-line results and incremental technology spend that began to show up and the cost of revenue this quarter. Non-GAAP operating expense of $18.2 million for the first quarter of 2019 or 32.7% of revenue represented a savings of $2 million year-over-year. We made prudent and calculated reductions in a number of functional areas as we organize the business for future success and took a one-time below the line restructuring charge of $1.1 million in Q1 2019, tied primarily to employee severance. It is also important to note that $2 million of year-over-year OpEx reduction represents a net savings of 10% compared to the Q1 2018 baseline as we rationalize spend throughout the organization while simultaneously making meaningful net new investment in support of our digital transformation strategy, client delight initiatives and global account management organization. Overall, I'm pleased to see the level of discipline our leaders are bringing around the spend and investments to their respective cost centers as we continue our stewardship of available capital and resources. At the bottom line, we generated adjusted EBITDA of $1 million for the first quarter of 2019 compared to $1.6 million in the year ago period. Our non-GAAP net loss for the quarter for the first quarter of 2019 was $1.1 million, or $0.01 on a per share basis compared to a non-GAAP net loss of $500,000 or $0.01 per share in the year ago period. Turning to select balance sheet and cash flow items. As of March 31, 2019 we had cash, cash equivalents and restricted cash of $27.1 million and we're debt free with no borrowings under the company's $40 million revolving line of credit. We had $50.9 million of net accounts receivable and DSOs were 83 days, up seven days year-over-year due to the lower comparable revenue and delayed receipts beyond quarter end from several accounts. Cash flow generated by operations during the first quarter of 2019 was $2.1 million and CapEx was $2.9 million including $2.1 million of capitalized internally developed software, resulting in negative free cash flow of $800,000 in the quarter. As we shared on our February call, we are no longer providing quarterly financial guidance as we are taking strategic actions and making investment and resourcing decisions with the longer term cost-benefit horizon in mind. This decision was made with informed input from many of our stockholders and we have since received further favorable feedback from stakeholders, who appreciate the shift away from a shorter-term mindset. As you think about our cadence and trajectory through the year, it is important to bear in mind that churn and contraction events from last year, will take several more quarters to lap. I spoke to this as a principle factor on our Q1 revenue comparable and due to the specific timing, magnitude and seasonality of last year's events, you should expect the impact to continue before beginning to moderate and abate later in the year. With that context and based on our first quarter 2019 financial results, the early progress that Gary spoke to in his remarks and the information currently available to us, we affirmed the full year 2019 guideposts that we laid out on our February call of approximately 3% to 5% year-over-year revenue contraction and approximately breakeven adjusted EBITDA. Let me pass the call back over to Gary.

[Gary Moore:]

Thank you, Rich. Let me summarize by saying that we are pleased with our first quarter financial results, encouraged by the early progress that is being made to transform and advance the business and confident from our interactions with clients and prospects that we are on the right long-term path. The leadership team and I remain committed and excited about the opportunity and believe the strategy we are executing will create meaningful value. Others may have the opinion that the road ahead will be too hard or take too long. But in my experience, things that are worth doing that can create the most value are rarely fast and never easy. With that, Shannon, please open the call to questions.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from Harry Warnick with B. Riley FBR. Your line is open.

[Harry Warnick:]

Hi, guys. Good job on the quarter. This is Harry on for Zach. I just had a question about the renewals that you spoke about earlier. You said 45% of the slate was coming up this year. And I was just wondering how you feel about your positioning on those renewals coming into the back half of the year.

[Gary Moore:]

Yeah, that's for the question and appreciate you being on the call. I think we're in the first quarter, so we feel pretty good about what we've been able to do in the quarter. I think as we continue to execute with our global account management program as well as our global services delivery group, we're more and more confident that we're getting ahead of it. Some of these clients are going to go ahead and churn because they are either divesting the business or bringing it in house. But to answer your question directly, we're pretty confident that the things that we're doing are having a positive impact, yet it's early days. We've got three more quarters to go for the year.

[Harry Warnick:]

Right, thank you. And then just one more, if I could, you gave some detail around the growth investments that were made in Q1. And I just was wondering if you could give us some extra color on the expected ramp up of those in the coming quarters?

[Gary Moore:]

Yes, so, the some hit in Q1 or will be at full ramp in Q2 of those expenses. And the implementation will continue throughout the year. There's – I mentioned there's a duplication of some of those expenses, and those roll off towards the end of the year.

[Harry Warnick:]

Right, okay, great. Thank you guys.

[Gary Moore:]

Thank you.

[Rich Walker:]

Thanks, Harry.

[Operator:]

[Operator Instructions] And I am currently showing no further questions at this time. I turn the call back over to Gary Moore for closing remarks.

[Gary Moore:]

Thank you, Shannon. So I just like to thank you everyone on the call for joining the call today. We had a busy and productive first quarter. I want to thank our clients, who have entrusted us with their business as well as express my appreciation and the company's appreciation to those clients. Our 3,700 ServiceSource employees around the world have delivered strongly in the quarter and are focused on driving to our plans for the rest of the year. So we look forward to talking with you again next quarter. And with that, Shannon, you can conclude the call.

[Operator:]

Thank you ladies and gentlemen. This concludes today’s conference. Thanks for your participation and have a wonderful day.