ServiceSource International, Inc.
Q1 2013 Earnings Call Transcript

Published: 9 May 2013

[Operator:]

Good day, ladies and gentlemen, and welcome to the ServiceSource First Quarter 2013 Earnings Conference Call. [Operator Instructions] And as a reminder, this call is being recorded. I will now like to turn the conference over to your host, Anne Bawden, from Investor Relations.

[Anne Bawden:]

Good afternoon, everyone, and thank you for joining us for ServiceSource's First Quarter 2013 Earnings Call. Joining me on the call today is our Chairman and CEO, Mike Smerklo; and Chief Financial Officer, Ashley Johnson. Before we begin, I'd like to remind you that during the course of this call, we may make projections or forward-looking statements that reflect our views as of today and are based upon the information currently available to us. This information will likely change over time. By discussing our current perception of our market and the future performance of the company and solutions with you today, we are not undertaking an obligation to provide updates in the future. We caution you that such statements are just projections, and actual events and results may materially differ from what we discuss. For more information, please refer to the documents we have filed with the SEC. These documents contain and identify important factors that could cause actual results to differ materially from those contained in our projections or forward-looking statements. During the course of this call, we will also be discussing certain non-GAAP financial results. We direct your attention to the reconciliation between GAAP and non-GAAP measures, which can be found in today's earnings release and is posted on the Investor Relations portion of the ServiceSource website. And with that, I'll turn the call over to Mike.

[Michael A. Smerklo:]

Thanks. Good afternoon, everyone, and thank you for joining us today to review our first quarter 2013 results. On today's call, I'll quickly cover key financial details from our first quarter, give you an update on Renew OnDemand and conclude by outlining our progress against our 5 key corporate initiatives for the year. Let's begin with our first quarter highlights, which were solid and above guidance on all counts. Total revenue in the first quarter was $61.1 million, non-GAAP gross margins in the first quarter were 40%, and adjusted EBITDA was a loss of approximately $0.5 million in Q1. It was a strong quarter for us in terms of new ACV as well. We saw a good mix of new and expansion logos in the quarter with new deals in 4 of our 5 target verticals. Expansions during the quarter included industry leaders like Google and SuccessFactors, among others, and on the new customer front, we added several new logos, including BTI net, Bazaarvoice [ph] and a global provider in the workforce optimization space, just to name a few. During the quarter, we sold 4 Renew OnDemand deals, including an expansion with a Fortune 50 technology customer that went live earlier this week. While this partnership is starting as a pilot engagement, it has a potential for a sizable geographic expansion in a short period of time. These new wins have us on track to have 6 customers, a mix of existing and new, live on Renew OnDemand by the end of this quarter, exceeding our goal of having 5 live by midyear. We are pleased with the start to this year, and the most exciting aspect in our business right now is how quickly the market is embracing Renew OnDemand as the only cloud application purpose-built to help companies drive growth through recurring revenue management. This puts ServiceSource in an increasingly enviable market position. Given how much progress we have made over the past 100 days with Renew, I want to provide a few updates on this critical part of our business. Last month, we launched our spring release of Renew OnDemand, which enhanced our ability to draw fragmented data from multiple systems and create true renewal-ready data in a single system of record. This release also added 15 new recurring revenue metrics and role-specific dashboards providing a much rich -- much richer user experience. This is the first of 3 releases you can expect from us this year. In addition, we filed 5 Renew-based patent applications in Q1 and look to file several more this month. This is the testimony to the tremendous value in the intellectual property we've built into Renew OnDemand. Next, our first large technology customer who was the early adopter of Renew has moved into production in phase 1 of its global deployment. This is an incredible accomplishment for the team given the significant scale of this deployment. With this customer alone, we are now managing over 150 million records, representing 7 years of customer purchase history and that's just phase 1. By comparison, the pilot engagement with the Fortune 50 customer I referenced earlier went live after only 6 weeks. Both are exciting achievements in their own respects. Let me also give you some perspective on our financial progress with Renew OnDemand. Though it's still early and we expect lumpiness at the outset, the technologies business we have incubated has now generated approximately $20 million in total subscription bookings since the beginning of 2012. On these technology subscriptions, we are seeing average contract terms of approximately 2 years and sometimes longer. In addition, we are also seeing strong attach rates for our professional services. And while this is a new revenue stream for us, we are seeing a lot of interest as we build out our implementation capabilities. With that as a backdrop, I now like to shift the conversation to our corporate-wide initiatives to give investors an update on our progress during the first quarter. As we outlined in our last call, the 5 key initiatives were

[Ashley F. Johnson:]

Thanks, Mike. Good afternoon, everyone. As Mike called out earlier, we were pleased with our results in Q1, exceeding our guidance across all key metrics

[Michael A. Smerklo:]

Thanks, Ashley. Before I close, I want to say thank you to our ServiceSource employees worldwide for their incredible hard work and continued dedication. Of note, there's an amazing group of employees in engineering, product development, professional services and PMO who have worked tirelessly to bring Renew OnDemand to life. And while there are too many names to name on this call, I'd like to send a personal thank you to team leaders such as Chilea [ph], Kenji [ph] and Deb [ph], among others, for their leadership and commitment, bringing 2 Fortune 50 companies live on Renew this week alone. Thanks again for joining us today. We look forward to see you during the quarter. I will now turn it over to question and answers.

[Operator:]

[Operator Instructions] Our first question in queue is from Jennifer Lowe of Morgan Stanley.

[Jennifer Swanson Lowe:]

My first question, Mike, is for you. As you look at some of these Renew OnDemand customers that you've been signing and as they start to move forward into pilots and beyond, can you characterize a little bit what those customers look like? And specifically, what I'm looking for is, would you characterize them as customers that might have considered ServiceSource as a full managed service provider but Renew OnDemand is incrementally more attractive and they're going with that, or are you starting to get into opportunities that never would have considered the full managed service or were unlikely to consider the full managed service in the first place?

[Michael A. Smerklo:]

Yes. Thanks, Jen. Welcome back. What I would say is that, at the highest level, it's great to see our strategy playing out, which was to give customers more ways to buy from us. I think that there's a pronounced recognition that Renew OnDemand is the only purpose-built cloud application, and we're seeing a healthy interest across the board. As it relates to the customers that we've signed, I'm most excited in that it's a pretty good mix. And I think that underscores how big this market opportunity are -- is. It is a combination of both customers that are new to ServiceSource, and customers who, perhaps, in one case, where we're working with them today, but Renew is now being sold into a new line of business where we weren't getting traction. So I don't see any signs of this becoming an either/or. We think it's additive. We're seeing a lot of interest across the board, and I think it's -- the managed service is now becoming an interesting add-on to Renew, and that's what we're trying to progress forward as a business.

[Jennifer Swanson Lowe:]

And then secondly, I just wanted to follow up on the comment that maybe the hiring in professional services was a little slower than expected. Was that due to just challenges finding the right people? Or was the need for professional services less than you expected? Could you just add some color around that?

[Ashley F. Johnson:]

Sure, I'd say our first order of priority was to bring an executive leader into that team to really build out the organization, and that is what we achieved in Q1. And then it was building out both the partnership that we have with Pactera as well as hiring new team members for the implementation. So while it's a little bit slower on the sense [ph] side than we expected to see in the quarter, I'd say we're still on track for building out this organization.

[Jennifer Swanson Lowe:]

Okay. And then just one last one for me, and looking at the changes in fiscal '13 guidance, which were pretty limited but reiterating the net income, reducing the CapEx by about $1 million at the midpoint but then free cash flow moving $2 million higher, and it sounded like the delta there was on the deferred revenue side. And I think the comment was that you were seeing earlier cash -- or more cash upfront with Renew OnDemand. Is that -- I guess there's 2 ways to take it, either you're tracking where you thought you would in terms of customers but you're getting more cash upfront or you are tracking ahead of where you thought you would be on Renew OnDemand. Can you just give a little color on that?

[Ashley F. Johnson:]

Absolutely. It's couple of factors. The first one is simply the improvement in invoicing and collection processes that I referred to that drove higher cash collections in Q1 and really expecting to see these improvements continue throughout the year. But then also, signing subscription engagements faster in the year than we expected, which we do take that cash upfront versus billing in arrears in our managed services business. So it's a combination of the 2 factors that caused us to increase our guidance.

[Operator:]

Our next question in queue is from Rahul Bhangare of William Blair.

[Rahul Bhangare:]

First off, on the pipeline, could you give us a little bit more color on the composition of that, maybe as it relates to OnDemand versus your managed services and then also as it relates to geography and by vertical?

[Michael A. Smerklo:]

Yes, sure. So I'd say, generally speaking, talking about the pipeline broadly, it's healthy. We've seen it's up in a good manner year-over-year, I mentioned the focus is not only on continuing to drive that forward but getting better close rates. So I'd say generally speaking, the demand is healthy across the board. I'd also say or highlight that it's still early. We just rolled out Renew to the sales team 100 days ago. We're in learning mode, and there's a lot of excitement around this new offering. But it's still early and there's a lot of learning around it. But I think the pipeline is overall healthy, and it's a good mix between general interest in Renew OnDemand but continued interest on the complete solution. We're going through a big show season. For example, we were at a conference this week where, I think, we did approximately 400 to 500 different demonstrations, unique demonstrations of Renew, just to give you an idea of where we are in the early stages of this. So it's generally good. I would say in terms of the geographic, it's reasonably spread out, consistent with our sales force. If you look at our sales force deployment in terms of our reps, the bulk of them sit in North America and then in Europe and in Asia. I'd say right now, the bulk of the activity is between North America and Europe, and then, obviously, Asia, there's some activity. But it really is based on where our sales team is and the maturity of that -- of the individuals and leaders there.

[Rahul Bhangare:]

And then as it relates to the sales force, I think, last quarter, you mentioned there are about 49 salespeople and there are about 75% ramped. Could you give us an update on those numbers?

[Michael A. Smerklo:]

Yes, sure. As we mentioned, we're going to continue throughout the year to look to make modest investments in our sales team. It's really about getting -- continuing to get great folks on and then, to your point, getting them ramped. At the end of Q1, we ended up with 51, so the number was up net 2 quarter-over-quarter -- or I'm sorry -- yes, quarter-over-quarter. And I would -- our estimate is about 85% of them are ramped now, and that's as you'd expect as we move through. Important to note that, that number was 75% in Q4 and about 60% in Q3. So you see the sales team were through the build. We'll continue to add on and now, it's about getting them trained and building pipeline. So that's good. I also noted that sales cycles were down modestly. I think that's a combination of expansions, Renew and also having a more mature sales team. And again, we just got to keep hitting the demand there and focus on close rates.

[Operator:]

Our next question in queue is from the line of Scott Berg of Northland Capital.

[Scott R. Berg:]

A couple of questions here. First of all, Mike, you talked about, I believe, it was $20 million in total Renew OnDemand bookings, or maybe it was Ashley, since the beginning of 2012. Can you give us any kind of directional comments as to what you're expecting that might turn into revenue in '13? And how that, I guess, is expected to flow in the income sheet? I assume it's back-end loaded towards the fourth quarter.

[Ashley F. Johnson:]

So the $20 million subscription bookings number does reflect the total subscription bookings for those customers. And I believe, Mike also noted that those are 2-year contract. So you can see those revenues will be recognized ratably over 2 years. The large contract that we signed last year, we told you, was a bit unique in that we had phased deployments, so our invoicing schedule is really tied to those phases. So we've moved through phase 1, and we'll start to see some revenue released from that account as you will over the next few quarters. So yes, it will be phased basically over the next 2 years. Some of that you would have already seen. But really, it's going to start to accumulate over the next quarters.

[Scott R. Berg:]

Okay, great. Then the last question for me is, your revenues in EMEA ticked up a little bit this year, where we've seen some other companies have some challenges there. And while it's not an overly meaningful number, can you comment on what you're seeing in terms of overall demand, specifically in EMEA, and if that's a trend that you expect to at least continue, given their current challenges?

[Michael A. Smerklo:]

Yes, I'd say that, generally speaking, we continue to see great opportunity in Europe. Actually, we're probably seeing more interest there in the last 12 months than we had the prior 12 months. And again, it's small numbers in terms of the team there, but I think that, that's indicative of overall market if you can put it there that's gone through some challenges. People now start to come up for breath and start to say, "Okay, how can I keep my business afloat and drive incremental revenue?" And that's really where our proposition fits squarely. And we also think that the international markets will be as good or better for Renew because of -- again, the need there is just as strong as it is domestically. So I think that our International business should continue to trend as good or on par with the rest of the business.

[Operator:]

[Operator Instructions] Our next question in queue is from Mark Murphy of Piper Jaffray.

[Unknown Analyst:]

This is Ben Jalim [ph] here for Mark. First of all, the ACV growth, is it possible to compare the ACV growth in Q1 as compared to last year for the same time period?

[Michael A. Smerklo:]

Yes. I would say that, at the highest level, and just a reminder, we had planned for -- after last year, seeing the seasonality, we planned -- we built that into our plan this year. As I mentioned in the earnings discussions, we were slightly ahead of plan. And I think, therefore, the inference -- or that you can draw from that, that it was up year-over-year.

[Unknown Analyst:]

Okay, got it. And around -- as you -- I guess, as you transition into this new strategy of leading with the SaaS product, I was wondering if -- I'm guessing there's a big change in the comp structure for sales or you are getting new salespeople as well but those who were already there for the managed services. I mean, how -- is that transition well behind us or is it still going on? And how are you tracking to that?

[Michael A. Smerklo:]

Yes. So on the sales transition, a reminder, one of the things we highlighted last call was that we've gone through a sales transition last year. We started planning, I would say, 1.5 years ago, bringing in a different set of sales professionals and different leader. And we focused, at that time, on getting individuals and executives that had deep SaaS and software experience. So I would say -- I think I mentioned last call that the sales team was probably our most ready, if you will, in terms of the transition. Now with that as a backdrop, we went through a robust training at the start of the year. We went through and revised all of our marketing materials, all of our value proposition, if you will, in this unbundling. So that's going to take time to get up to speed and get that message out in the marketplace. So that's taking time, but I think the sales team is more than ready and is able to sell the attributes of Renew OnDemand. We also have given them additional comp accelerators, if you will, to sell Renew OnDemand. And that's something we rolled out at the start of the year where there's more quota credit giving for Renew OnDemand versus managed service. Managed service is still a critical part of our business, obviously. So I would say the transition in this team is up to speed. It's just a matter of getting this out in the marketplace and learning as customers see our new positioning and packaging.

[Unknown Analyst:]

Got it. And what about any anomaly in terms of ramp times for customers within the quarter, especially on the managed services business? Or was it fairly typical?

[Ashley F. Johnson:]

I'd say the ramp times that we saw in the quarter were fairly typical. I referenced the fact that we signed 2 very large global expansions last year. Any time we have large global expansions, we've highlighted the fact that those ramps can be particularly impactful in the short term, as we scale the expenses and the revenues trail that. But it was as expected and on track.

[Operator:]

And with that, I'm showing no further questions in queue. We'd like to conclude today's conference call. And thank you, ladies and gentlemen, for joining. You may now disconnect. Have a great day.